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The Accountancy Model Examples

Tim Riley AccountancyModel.com November 8, 2013

ii Copyright c 2006-2008 Tim Riley. This version of The Accountancy Model and The Accountancy Model Examples may be reproduced and transmitted provided that 1) the copies are not made for resale and 2) the title page, the copyright notice, this notice, and the disclaimer below are retained. However, future versions of these publications will have reproduction and transmission copy rights fully reserved. THIS WORK IS PROVIDED ON AN AS IS BASIS. THE AUTHOR PROVIDES NO WARRANTY WHATSOEVER, EITHER EXPRESS OR IMPLIED, REGARDING THE WORK, INCLUDING WARRANTIES WITH RESPECT TO ITS MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.

0.1. PREFACE

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0.1

Preface

This is an accounting math book. Technically, it is interconnected GAAP formulas forming algorithms that generate journal entries. First, accounting concepts are dened into a vocabulary. Then the relationships between the accounting concepts are mathematically expressed. By expressing concepts in math form instead of in essay form, clarity and precision are gained. Moreover, the math formulas are labeled, and subsequent uses of a particular formula carry the formulas label for backward reference. This labeling and backward referencing provides interconnection. Also, the formulas are sequenced to form algorithms. By expressing accounting algorithmically, the mechanics of accounting become intuitive. Two companion books comprise this set: The Accountancy Model and The Accountancy Model Examples. Additional copies of The Accountancy Model and The Accountancy Model Examples may be downloaded from http://AccountancyModel.com. Moreover, this is a work in progress. Empty sections are placeholders for future work. Complaints, corrections, suggestions, and requests are encouraged. Please email timriley@appahost.com.

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Contents
0.1 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii 1 1 1 2 3 5 6 12 15 17 19 20 25 29 29 29 31 31 35 39 39 39 40 41 43 45 46 48 50 53 53 54 56 58 59 60 61 63 64 65

1 Revenues and Receivables Examples 1.1 Business Sales: Net Sales . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Aging Accounts Receivable Method . . . . . . . . . . . . . . . . . . . 1.3 Right of Return Exists: No Estimate . . . . . . . . . . . . . . . . . . 1.4 Right of Return Exists: With Estimate . . . . . . . . . . . . . . . . . 1.5 Construction Percent-of-Completion Method: Simple . . . . . . . . . 1.6 Construction Percent-of-Completion Method: Comprehensive . . . . 1.7 Construction Percent-of-Completion Method: Current Period Loss . 1.8 Construction Percent-of-Completion Method: Unprotable Contract 1.9 Installment Sales Method: Simple . . . . . . . . . . . . . . . . . . . . 1.10 Installment Sales Method: Tricky . . . . . . . . . . . . . . . . . . . . 1.11 Installment Sales Method: Comprehensive . . . . . . . . . . . . . . . 1.12 Cost Recovery Method . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Inventory Examples 2.1 Basic Inventory Identity: Simple . . . 2.2 LIFO Periodic . . . . . . . . . . . . . . 2.3 Dollar Value LIFO: Simple . . . . . . 2.4 Dollar Value LIFO: Comprehensive . . 2.5 Absorption Costing Method of Process

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3 Property Plant and Equipment Examples 3.1 Self-constructed Asset . . . . . . . . . . . 3.2 Impairment Loss . . . . . . . . . . . . . . 3.3 Natural Resources Depletion . . . . . . . 3.4 Natural Resources Restoration . . . . . . 3.5 Interest Capitalization . . . . . . . . . . . 3.6 Interest Capitalization . . . . . . . . . . . 3.7 Interest Capitalization . . . . . . . . . . . 3.8 Interest Capitalization . . . . . . . . . . . 3.9 Interest Capitalization . . . . . . . . . . .

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4 Liabilities Examples 4.1 Payroll Journal Entry: Simple . . . . . . . . . . . 4.2 Payroll Journal Entry: Complex . . . . . . . . . 4.3 Compensated Absenses . . . . . . . . . . . . . . . 4.4 Warranty Claims: Expected Cash Flow Approach 4.5 Bond Issue . . . . . . . . . . . . . . . . . . . . . 4.6 Installment Note: Simple . . . . . . . . . . . . . 4.7 Installment Note: Complex . . . . . . . . . . . . 4.8 Bond Early Reacquisition: Simple . . . . . . . . 4.9 Bond Early Reacquistion: Complex . . . . . . . . 4.10 Troubled Debt Restructuring . . . . . . . . . . .

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vi 5 Shareholders Equity Examples 5.1 Share Repurchase: Retirement Method . . . . . . . . 5.2 Share Repurchase: Treasury Method . . . . . . . . . 5.3 Stock Appreciation Plan: Simple . . . . . . . . . . . 5.4 Stock Appreciation Plan: Comprehensive . . . . . . 5.5 Basic and Diluted Earnings Per Share . . . . . . . . 5.6 Basic Earnings Per Share: Fluctuating Outstanding 5.7 Interim Financial Statements . . . . . . . . . . . . . 6 Statement of Cash Flows Examples 6.1 Indirect Method Presentation: Simple . 6.2 Indirect Method Presentation: Complex 6.3 Indirect Method Presentation: Complex 6.4 Direct Method Presentation: Complex . 6.5 Cash Flow Calculations: Simple . . . . . 6.6 Cash Flow Calculations: Comprehensive

CONTENTS 67 67 68 69 72 74 75 76 79 79 80 82 85 89 91 95 95 95 100 103 107 107 107 108 108 109 111 116 121 127 132 134 136 137 139 141 143 143 144 148 151 154 159 159 169 174 177 182 189 196 199

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7 Investments and Bonds Examples 7.1 Stock Fair Value Method SAS: Simple . . . . . 7.2 Stock Fair Value Method SAS: Comprehensive 7.3 Equity Method . . . . . . . . . . . . . . . . . . 7.4 Bond Held To Maturity: Amortized Method . .

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8 Consolidation Method Examples 8.1 Business Combinations: Statutory Merger . . . . . . . . . . . . . . 8.2 Business Combinations: Statutory Consolidation . . . . . . . . . . 8.3 Contingent Consideration: Net Income . . . . . . . . . . . . . . . . 8.4 Contingent Consideration: Acquirers Stock Price . . . . . . . . . . 8.5 Consolidation Method: No Preacquisition Earnings . . . . . . . . . 8.6 Consolidation Method: Preacquisition Earnings/100% Acquisition 8.7 Consolidation Method: Preacquisition Earnings/75% Acquisition . 8.8 Consolidation Method: Subsequent Earnings/100% Acquisition . . 8.9 Consolidation Method: Subsequent Earnings/75% Acquisition . . . 8.10 Inventory Transaction, One Time, Year0 sold = 0 . . . . . . . . . . 8.11 Inventory Transaction, One Time, Year0 sold = 30% . . . . . . . . 8.12 Fixed Asset Transaction: End of Year Sale . . . . . . . . . . . . . . 8.13 Fixed Asset Transaction: Begin-Year Sale . . . . . . . . . . . . . . 8.14 Fixed Asset Transaction: Mid-Year Sale . . . . . . . . . . . . . . . 8.15 Consolidated Dividends . . . . . . . . . . . . . . . . . . . . . . . . 9 Lease Examples 9.1 Operating Lease . . . 9.2 Capital Lease: Lessee 9.3 Capital Lease: Lessor 9.4 Capital Lease: Lessee 9.5 Capital Lease: Lessor

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10 Retirement Benet Plan Examples 10.1 Dened Benet Plan: Simple . . . . 10.2 Dened Benet Plan: Complex . . . 10.3 Dened Benet Plan: 20X3 . . . . . 10.4 Dened Benet Plan: 20X4 . . . . . 10.5 Dened Benet Plan: 20X5 . . . . . 10.6 Dened Benet Plan: 20X6 . . . . . 10.7 Other Post-Retirement Benet Plan: 10.8 Other Post-Retirement Benet Plan:

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CONTENTS 11 Interperiod Tax Examples 11.1 Proportional Taxes Example . . . . . . . . . . . . . . . . 11.2 Progressive or Regressive Taxes Example . . . . . . . . . 11.3 Interperiod Tax Journal Entry: Max Company Year 1 . 11.4 Interperiod Tax Journal Entry: Max Company Year 2 . 11.5 Interperiod Tax Journal Entry: Smith, Inc. . . . . . . . . 11.6 Calculate Net Income: Jones, Inc. . . . . . . . . . . . . . 11.7 Calculate Income Tax Expense: Williard Company Year 11.8 Calculate Income Tax Expense: Williard Company Year 11.9 Calculate Eective Tax Rate: Blue Paper Year 1 . . . . 11.10Calculate Eective Tax Rate: Blue Paper Year 2 . . . . 12 Foreign Transactions Examples 12.1 Purchase Transaction, Immediate Payment 12.2 Purchase Transaction, Delayed Payment . . 12.3 Purchase Transaction, Balance Sheet Date . 12.4 Purchase Transaction, Forward Contract . . 12.5 Purchase Transaction, Option Contract . . 13 Partnerships Examples 13.1 Partnership Formation . . . . . . . 13.2 Weighted Average Capital Balance 13.3 Interest Compensation . . . . . . . 13.4 Bonus Compensation . . . . . . . . 13.5 Salary Compensation . . . . . . . . 13.6 Residual Compensation . . . . . . 13.7 New Partner, Bonus Method . . . 13.8 New Partner, Goodwill Method . .

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14 Accounting Changes and Error Correction Examples 237 14.1 Change from LIFO to FIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 14.2 Change from Completed-contract to Percentage-of-completion . . . . . . . . . . . . . . . . . . . . . . . . . . 240 14.3 Expense Omission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 15 State and Local General Governmental Fund Examples 15.1 General Funds: Simple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 General Funds: Comprehensive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 Closing Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 . 245 . 249 . 256

16 State and Local Government Capital Project Fund Examples 261 16.1 Comprehensive Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 17 State and Local Government Debt Service Fund Examples 267 17.1 Regular Serial Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 17.2 Term Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 18 State and Local Government Proprietary Fund Examples 277 18.1 Comprehensive Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 19 State and Local Government Fidiciary 19.1 Tax Agency Fund Example . . . . . . 19.2 Tax Agency Fund Example . . . . . . 19.3 Tax Agency Fund Example . . . . . . 19.4 Investment Trust Fund Example . . . Fund . . . . . . . . . . . . . . . . Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 283 284 286 289

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20 Individual Federal Income Taxes Examples 305 20.1 Tax Return Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 20.2 Child Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

viii

CONTENTS

Chapter 1

Revenues and Receivables Examples


1.1 Business Sales: Net Sales

Example 1, Business Sales: Net Sales A rms cash sales for the current year were $20,000. Its credit sales were $80,000. During the year the rm granted $4,000 of returns and allowances on current year sales. At year-end, $2,000 more returns and allowances are considered probable on current year sales. The rm uses the gross method to account for sales (cash) discounts and recorded $1,000 of sales discounts during the year. An additional $400 of discounts are expected to be taken with the discount period on this years sales after the end of the year. Compute net sales for the year. Solution 1: 1. Business Sales: Net Sales (1.3.6) Business Sales: Net Sales = + Sales Amount (1.1.22) Sales Discount Amount (1.3.4) Estimated Future Sales Discounts on Current-Year Sales Returns on Current-Year Sales Estimated Future Returns on Current-Year Sales Business Sales: Net Sales = 100,000 1,000 400 4,000 2,000 92,600

1.2

Aging Accounts Receivable Method

Example 2, Aging Accounts Receivable Method Allowance for Doubtful Accounts Credit Balance = $2,000. Amount Uncollectible Percent Not Yet Due $40,000 1% Past Due 20,000 18% What is the amount of net accounts receivable? Solution 2: 1. Allowance for Doubtful Accounts Table (1.5.2) A/R Amount (1) Uncollectible Percent (2) Product (1) (2) Not Yet Due Past Due 1-30 days Past Due 31-60 days Past Due 61-90 days Past Due over 90 days = A/R Debit Balance = (1.5.1) A/R Amount (1) Uncollectible Percent (2) Product (1) (2) Not Yet Due 40,000 0.01 400 Past Due 20,000 0.18 3,600 60,000 4,000 2. Allowance for Doubtful Accounts Ending Balance (1.5.1) Allowance for Doubtful Accounts Ending Balance = 1

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES + Accounts Receivable Not Yet Due Not Yet Due Estimated Percent + Accounts Receivable Past Due 1-30 days Past Due 1-30 days Estimated Percent + Accounts Receivable Past Due 31-60 days Past Due 31-60 days Estimated Percent + Accounts Receivable Past Due 61-90 days Past Due 61-90 days Estimated Percent + Accounts Receivable Past Due over 90 days Past Due over 90 days Estimated Percent Allowance for Doubtful Accounts Ending Balance = 4,000 3. Net Accounts Receivable Net Accounts Receivable = Accounts Receivable Debit Balance Allowance for Doubtful Accounts Ending Balance Net Accounts Receivable = 60,000 4,000 = 56,000

1.3

Right of Return Exists: No Estimate

Example 3, Right of Return Exists: No Estimate Credit sales = $100,000. Gross prot percentage = 40%. Cash collected = $60,000. Sales returns on current-year sales = $20,000 ( credit A/R). Year-end return privilege not yet expired = $5,000. Prepare the sales journal entry. Prepare the cash collected journal entry. Prepare the inventory returns journal entry. Prepare the adjusting journal entry. Note: use 12/31/X5 for all journal entries. Solution 3: 1. Cost of Goods Sold Amount (1.1.15) Cost of Goods Sold Amount = Sales Amount (1.1.22) [1 Gross Prot Percentage (1.1.25)] OR Cost of Goods Sold Amount = Cost Amount (1.1.23) Cost of Goods Sold Amount = 100,000 [1 0.40] = 60,000 2. Sales Journal Entry (1.10.1) XX/XX/XX Debit Accounts Receivable (1.1.11) Sales Amount (1.1.22) Cost of Goods Sold (1.1.14) Cost Amount (1.1.23) or (1.1.15) Sales Revenue (1.1.1) Inventory (1.1.10) Debit Credit Accounts Receivable 100,000 Cost of Goods Sold 60,000 Sales Revenue 100,000 Inventory 60,000 Debit Cash (1.1.9) Cash Amount Accounts Receivable (1.1.11) Debit Credit Cash (1.1.9) 60,000 Accounts Receivable 60,000 Credit Cash Amount Credit

Sales Amount (1.1.22) Cost Amount (1.1.23) or (1.1.15)

12/31/X5

3. Cash Collected Journal Entry (1.10.2) XX/XX/XX

12/31/X5

4. Actual Returns: Current Year Sale (1.10.4) Inventory Adjustment Amount = Quantity Returned Cost Per Item OR Inventory Adjustment Amount = Sales Return Amount (1.10.3) [1 Gross Prot Percentage (1.1.25)]

1.4. RIGHT OF RETURN EXISTS: WITH ESTIMATE Journal Entry Sales Returns and Allowances Inventory (1.1.10) Accounts Receivable (1.1.11) Cost of Goods Sold (1.1.14) Inventory Adjustment Amount = 20,000 [1 - 0.04] Journal Entry Debit 12/31/05 Sales Returns and Allowances 20,000 Inventory 12,000 Accounts Receivable Cost of Goods Sold XX/XX/XX Debit Sales Return Amount (1.10.3) Inventory Adjustment Amount

Credit

Sales Return Amount (1.10.3) Inventory Adjustment Amount = 12,000 Credit

20,000 12,000

5. Adjusting Journal Entry (1.10.5) Deferred Gross Prot Adjustment = Sales: Unexpired Return Privilege Gross Prot Percentage (1.1.25)] Cost of Goods Sold Adjustment = Sales: Unexpired Return Privilege [1 Gross Prot Percentage (1.1.25)] Journal Entry Debit Sales Revenue (1.1.1) Sales: Unexpired Return Privilege Cost of Goods Sold (1.1.14) Deferred Gross Prot (1.1.19) Deferred Gross Prot Adjustment = 5,000 0.40 = 2,000 Cost of Goods Sold Adjustment = 5,000 [1 0.40] = 3,000 Journal Entry Debit Credit 12/31/X5 Sales Revenue 5,000 Cost of Goods Sold 3,000 Deferred Gross Prot 2,000 12/31/XX Credit Cost of Goods Sold Adjustment Deferred Gross Prot Adjustment

1.4

Right of Return Exists: With Estimate

Example 4, Right of Return Exists: With Estimate Credit sales = $100,000. Gross prot percentage = 40%. Cash collected = $60,000. Sales returns on current-year sales = $20,000 ( credit A/R). Estimated returns percent = 30%. Prepare the sales journal entry. Prepare the cash collected journal entry. Prepare the inventory returns journal entry. Prepare the adjusting journal entry. Note: use 12/31/X5 for all journal entries. Solution 4: 1. Cost of Goods Sold Amount (1.1.15) Cost of Goods Sold Amount = Sales Amount (1.1.22) [1 Gross Prot Percentage (1.1.25)] OR Cost of Goods Sold Amount = Cost Amount (1.1.23) Cost of Goods Sold Amount = 100,000 [1 0.40] = 60,000 2. Sales Journal Entry (1.11.5)

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES Debit Accounts Receivable (1.1.11) Sales Amount (1.1.22) Cost of Goods Sold (1.1.14) Cost Amount (1.1.23) or (1.1.15) Sales Revenue (1.1.1) Inventory (1.1.10) Debit Credit Accounts Receivable 100,000 Cost of Goods Sold 60,000 Sales Revenue 100,000 Inventory 60,000 Credit

XX/XX/XX

Sales Amount (1.1.22) Cost Amount

12/31/X5

3. Cash Collected Journal Entry (1.11.2) XX/XX/XX Debit Cash (1.1.9) Cash Amount Accounts Receivable (1.1.11) Debit Credit Cash (1.1.9) 60,000 Accounts Receivable 60,000 Credit Cash Amount

12/31/X5

4. Actual Returns: Current Year Sale (1.11.4) Inventory Amount = Quantity Returned Cost Per Item OR Inventory Amount = Sales Return Amount (1.11.3) [1 Gross Prot Percentage (1.1.25)] Journal Entry Sales Returns and Allowances (1.8) Inventory (1.1.10) Accounts Receivable (1.1.11) Cost of Goods Sold (1.1.14) Inventory Adjustment Amount = 20,000 [1 - 0.40] Journal Entry Debit 12/31/X5 Sales Returns and Allowances 20,000 Inventory 12,000 Accounts Receivable Cost of Goods Sold (1.1.14) XX/XX/XX Debit Sales Return Amount (1.11.3) Inventory Amount Credit

Sales Return Amount Inventory Amount = 12,000 Credit

20,000 12,000

5. Adjusting Journal Entry (1.11.5) Estimated Returns = Sales Amount (1.1.22) Estimate Returns Percent Estimated Additional Returns = Estimated Returns Sales Return Amount (1.11.3) Deferred Gross Prot Adjustment = Estimated Additional Returns Gross Prot Percentage (1.1.25) Cost of Goods Sold Adjustment = Estimated Additional Returns [1 Gross Prot Percentage (1.1.25)] Journal Entry Debit 12/31/XX Sales Returns and Allowances Estimated Additional Returns Cost of Goods Sold (1.1.14) Deferred Gross Prot (1.1.19) Estimated Returns = 100,000 0.30 = 30,000 Estimated Additional Returns = 30,000 20,000 = 10,000 Deferred Gross Prot Adjustment = 10,000 0.40 = 4,000 Cost of Goods Sold Adjustment = 10,000 [1 - 0.40] = 6,000 Journal Entry

Credit Cost of Goods Sold Adjustment Deferred Gross Prot Adjustment

1.5. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: SIMPLE Debit 10,000 Credit 6,000 4,000

12/31/X5

Sales Returns and Allowances Cost of Goods Sold Deferred Gross Prot

1.5

Construction Percent-of-Completion Method: Simple

Example 5, Percent-of-Completion Method 20X1 Total Construction Revenues = $900,000. Costs Incurred = $200,000 ( use A/P). Estimated Remaining Costs = $400,000. Billings = $150,000. Collections = $100,000. Prepare the percent-of-completion journal entries for the rst year. Solution 5: 1. 20X1 Long-Term Construction: Journal Entry for Purchases (1.20.4) Debit Credit XX/XX/XX Construction In Process (1.20.1) Cost Cash (1.1.9) and/or A/P Cost Debit Credit 12/31/X1 Construction In Process (1.20.1) 200,000 A/P 200,000 2. 20X1 Long-Term Construction: Journal Entry for Billings (1.20.5) Debit Credit XX/XX/XX Accounts Receivable (1.1.11) Invoice Amount Billings On Construction (1.20.3) Invoice Amount Debit Credit 12/31/X1 Accounts Receivable (1.1.11) 150,000 Billings On Construction (1.20.3) 150,000 3. 20X1 Long-Term Construction: Journal Entry Cash Receipt (1.20.6) Debit Credit XX/XX/XX Cash (1.1.9) Cash Received Accounts Receivable (1.1.11) Cash Received Debit Credit 12/31/X1 Cash (1.1.9) 100,000 Accounts Receivable (1.1.11) 100,000 4. 20X1 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X1. Let p = 20X0. Prior Costs = 0 5. 20X1 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 0 + 200,000 = 200,000 6. 20X1 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 200,000 + 400,000 = 600,000
p i=f

Period Costi

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES 7. 20X1 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 900,000 600,000 = 300,000 8. 20X1 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 200,000 Percent Complete = 600,000 = 1 3 9. 20X1 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = (900,000 1 3 ) 0 = 300,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 10. Prior Revenue Table (1.20.19) Year Revenues Total 20X1 300,000 300,000 11. 20X1 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) 1 ) 0 = 100,000 Period Gross Prot = (300,000 3 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 12. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X1 100,000 100,000 13. 20X1 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 300,000 100,000 = 200,000 14. 20X1 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X1 Construction In Process (1.20.1) 100,000 Construction Expenses (1.20.2) 200,000 Construction Revenues (1.20.7) 300,000

1.6

Construction Percent-of-Completion Method: Comprehensive

Example 6, Percent-of-Completion Method: Total Construction Revenues = 4,500,000. Other relevant information: 20X4 20X5 Costs to Date $1,000,000 $2,916,000 Remaining Costs Estimate 3,000,000 1,134,000 Progress Billings 900,000 2,400,000 Cash Collected 750,000 1,750,000

20X6 $4,050,000 1,200,000 2,00,000

Prepare all the percent-of-completion journal entries for three years.

1.6. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: COMPREHENSIVE

Solution 6: 1. 20X4 Long-Term Construction: Journal Entry for Purchases (1.20.4) Debit Credit XX/XX/XX Construction In Process (1.20.1) Cost Cash (1.1.9) and/or A/P Cost Debit Credit 12/31/X4 Construction In Process (1.20.1) 1,000,000 Cash (1.1.9) and/or A/P 1,000,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) balance 1,000,000 2. 20X4 Long-Term Construction: Journal Entry for Billings (1.20.5) Debit Credit XX/XX/XX Accounts Receivable (1.1.11) Invoice Amount Billings On Construction (1.20.3) Invoice Amount Debit Credit 12/31/X4 Accounts Receivable (1.1.11) 900,000 Billings On Construction (1.20.3) 900,000 Ledger Billings On Construction 12/31/X4 900,000 balance 900,000 3. 20X4 Long-Term Construction: Journal Entry Cash Receipt (1.20.6) Debit Credit XX/XX/XX Cash (1.1.9) Cash Received Accounts Receivable (1.1.11) Cash Received Debit Credit 12/31/X4 Cash (1.1.9) 750,000 Accounts Receivable (1.1.11) 750,000 4. 20X4 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X3. Prior Costs = 0 5. 20X4 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 0 + 1,000,000 = 1,000,000 6. 20X4 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 1,000,000 + 3,000,000 = 4,000,000 7. 20X4 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,000,000 = 500,000 8. 20X4 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 1,000,000 Percent Complete = 4,000,000 = 0.25
p i=f

Period Costi

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES 9. 20X4 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = (4,500,000 0.25) 0 = 1,125,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 10. Prior Revenue Table (1.20.19) Year Revenues Total 20X4 1,125,000 1,125,000 11. 20X4 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) Period Gross Prot = (500,000 0.25) 0 = 125,000 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 12. Prior Gross Prot Table (1.20.21) Total Year Gross Prot 20X4 125,000 125,000 13. 20X4 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,125,000 125,000 = 1,000,000 14. 20X4 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X4 Construction In Process (1.20.1) 125,000 Construction Expenses (1.20.2) 1,000,000 Construction Revenues (1.20.7) 1,125,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) balance 1,125,000 15. 20X5 Long-Term Construction: Journal Entry for Purchases (1.20.4) Debit Credit XX/XX/XX Construction In Process (1.20.1) Cost Cash (1.1.9) and/or A/P Cost Debit Credit 12/31/X5 Construction In Process (1.20.1) 1,916,000 Cash (1.1.9) and/or A/P 1,916,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) balance 3,041,000 16. 20X5 Long-Term Construction: Journal Entry for Billings (1.20.5)

1.6. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: COMPREHENSIVE Debit Invoice Amount Credit 2,400,000 Credit Invoice Amount

XX/XX/XX

Accounts Receivable (1.1.11) Billings On Construction (1.20.3) Accounts Receivable (1.1.11) Billings On Construction (1.20.3)

12/31/X5 Ledger

Debit 2,400,000

Billings On Construction 12/31/X4 900,000 12/31/X5 2,400,000 balance 3,300,000 17. 20X5 Long-Term Construction: Journal Entry Cash Receipt (1.20.6) Debit Credit XX/XX/XX Cash (1.1.9) Cash Received Accounts Receivable (1.1.11) Cash Received Debit Credit 12/31/X5 Cash (1.1.9) 1,750,000 Accounts Receivable (1.1.11) 1,750,000 18. 20X5 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X4.
p i=f

Period Costi

Prior Costs = 1,000,000 19. 20X5 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 1,000,000 + (2,916,000 1,000,000) = 2,916,000 20. 20X5 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 2,916,000 + 1,134,000 = 4,050,000 21. 20X5 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,050,000 = 450,000 22. 20X5 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 2,916,000 Percent Complete = 4,050,000 = 0.72 23. 20X5 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = [4,500,000 0.72] 1,125,000 = 2,115,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 24. Prior Revenue Table (1.20.19) Year Revenues Total 20X4 1,125,000 1,125,000 20X5 2,115,000 3,240,000

10

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

25. 20X5 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) Period Gross Prot = (450,000 0.72) 125,000 = 199,000 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 26. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X4 125,000 125,000 20X5 199,000 324,000 27. 20X5 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 2,115,000 199,000 = 1,916,000 28. 20X5 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X5 Construction In Process (1.20.1) 199,000 Construction Expenses (1.20.2) 1,916,000 Construction Revenues (1.20.7) 2,115,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) 12/31/X5 199,000 (1.20.23) balance 3,240,000 29. 20X6 Long-Term Construction: Journal Entry for Purchases (1.20.4) Debit Credit XX/XX/XX Construction In Process (1.20.1) Cost Cash (1.1.9) and/or A/P Cost Debit Credit 12/31/X6 Construction In Process (1.20.1) 1,134,000 Cash (1.1.9) and/or A/P 1,134,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) 12/31/X5 199,000 (1.20.23) 12/31/X6 1,134,000 (1.20.4) balance 4,374,000 30. 20X6 Long-Term Construction: Journal Entry for Billings (1.20.5) Debit Credit XX/XX/XX Accounts Receivable (1.1.11) Invoice Amount Billings On Construction (1.20.3) Invoice Amount Debit Credit 12/31/X6 Accounts Receivable (1.1.11) 1,200,000 Billings On Construction (1.20.3) 1,200,000

1.6. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: COMPREHENSIVE Ledger Billings On Construction 12/31/X4 900,000 12/31/X5 2,400,000 12/31/X6 1,200,000 balance 4,500,000 31. 20X6 Long-Term Construction: Journal Entry Cash Receipt (1.20.6) Debit Credit XX/XX/XX Cash (1.1.9) Cash Received Accounts Receivable (1.1.11) Cash Received Debit Credit 12/31/X6 Cash (1.1.9) 2,000,000 Accounts Receivable (1.1.11) 2,000,000 32. 20X6 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X5.
p i=f

11

Period Costi

Prior Costs = 1,000,000 + (2,916,000 1,000,000) = 2,916,000 33. 20X6 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 2,916,000 + (4,050,000 2,916,000) = 4,050,000 34. 20X6 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 4,050,000 0 = 4,050,000 35. 20X6 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,050,000 = 450,000 36. 20X6 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 4,050,000 Percent Complete = 4,050,000 = 1.00 37. 20X6 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = [4,500,000 1.00] 3,240,000 = 1,260,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 38. Prior Revenue Table (1.20.19) Year Revenues Total 20X4 1,125,000 1,125,000 20X5 2,115,000 3,240,000 20X6 1,260,000 4,500,000 39. 20X6 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21)

12

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES Period Gross Prot = (450,000 1.00) 324,000 = 126,000 Add this periods gross prot to the Prior Gross Prot Table (1.20.21).

40. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X4 125,000 125,000 20X5 199,000 324,000 20X6 126,000 450,000 41. 20X6 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,260,000 126,000 = 1,134,000 42. 20X6 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X6 Construction In Process (1.20.1) 126,000 Construction Expenses (1.20.2) 1,134,000 Construction Revenues (1.20.7) 1,260,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) 12/31/X5 199,000 (1.20.23) 12/31/X6 1,134,000 (1.20.4) 12/31/X6 126,000 (1.20.23) balance 4,500,000 43. Percent-of-Completion: Journal Entry Upon Construction Completion (1.20.24) Debit Credit 12/31/XX Billings On Construction (1.20.3) Total Construction Revenues Construction In Process (1.20.1) Total Construction Revenues Debit Credit 12/31/X6 Billings On Construction (1.20.3) 4,500,000 Construction In Process (1.20.1) 4,500,000

1.7

Construction Percent-of-Completion Method: Current Period Loss

Example 7, Current Period Loss using the Percent-of-Completion Method: Total Construction Revenues = 4,500,000. Other relevant information: 20X4 20X5 20X6 Costs to Date $1,000,000 $2,916,000 Remaining Costs Estimate 3,000,000 1,468,962 Prepare two years of revenue journal entries using the percent-of-completion method. Solution 7: 1. 20X4 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs =
p i=f

Period Costi

1.7. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: CURRENT PERIOD LOSS Let f = 20X4. Let p = 20X3. Prior Costs = 0 2. 20X4 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 0 + 1,000,000 = 1,000,000 3. 20X4 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 1,000,000 + 3,000,000 = 4,000,000 4. 20X4 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,000,000 = 500,000 5. 20X4 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 1,000,000 Percent Complete = 4,000,000 = 0.25 6. 20X4 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = (4,500,000 0.25) 0 = 1,125,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 7. Prior Revenue Table (1.20.19) Total Year Revenues 20X4 1,125,000 1,125,000 8. 20X4 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) Period Gross Prot = (500,000 0.25) 0 = 125,000 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 9. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X4 125,000 125,000 10. 20X4 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,125,000 125,000 = 1,000,000 11. 20X4 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X4 Construction In Process (1.20.1) 125,000 Construction Expenses (1.20.2) 1,000,000 Construction Revenues (1.20.7) 1,125,000

13

14 Ledger

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) balance 1,125,000 12. 20X5 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X4.
p i=f

Period Costi

Prior Costs = 1,000,000 13. 20X5 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 1,000,000 + (2,916,000 1,000,000) = 2,916,000 14. 20X5 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 2,916,000 + 1,468,962 = 4,384,962 15. 20X5 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,384,962 = 115,038 16. 20X5 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 2,916,000 Percent Complete = 4,384,962 = 0.665 17. 20X5 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = [4,500,000 0.665] 1,125,000 = 1,867,500 Add this periods revenue to the Prior Revenue Table (1.20.19). 18. Prior Revenue Table (1.20.19) Year Revenues Total 20X4 1,125,000 1,125,000 20X5 1,867,500 2,992,500 19. 20X5 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) Period Gross Prot = (115,038 0.665) 125,000 = -48,500 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 20. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X4 125,000 125,000 20X5 -48,500 76,500 21. 20X5 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,867,500 -48,500 = 1,916,000

1.8. CONSTRUCTION PERCENT-OF-COMPLETION METHOD: UNPROFITABLE CONTRACT 22. 20X5 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) < 0 then: Debit Credit 12/31/XX Construction Expenses (1.20.2) (1.20.22) Construction In Process (1.20.1) (1.20.20) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X5 Construction Expenses (1.20.2) 1,916,000 Construction In Process (1.20.1) 48,500 Construction Revenues (1.20.7) 1,867,500 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) 12/31/X5 48,500 (1.20.23) balance 2,992,500

15

1.8

Construction Percent-of-Completion Method: Unprotable Contract

Example 8, Unprotable contract using the Percent-of-Completion Method: Total Construction Revenues = 4,500,000. Other relevant information: 20X4 20X5 20X6 Costs to Date $1,000,000 $2,916,000 Remaining Costs Estimate 3,000,000 1,640,250 Prepare two years of revenue journal entries using the percent-of-completion method. Solution 8: 1. 20X4 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X3. Prior Costs = 0 2. 20X4 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 0 + 1,000,000 = 1,000,000 3. 20X4 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 1,000,000 + 3,000,000 = 4,000,000 4. 20X4 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,000,000 = 500,000 5. 20X4 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 1,000,000 Percent Complete = 4,000,000 = 0.25
p i=f

Period Costi

16

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES 6. 20X4 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = (4,500,000 0.25) 0 = 1,125,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 7. Prior Revenue Table (1.20.19) Year Revenues Total 20X4 1,125,000 1,125,000 8. 20X4 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) > 0 then: Period Gross Prot = [Total Gross Prot Estimate (1.20.16) Percent Complete (1.20.17)] Total Prior Gross Prot (1.20.21) Period Gross Prot = (500,000 0.25) 0 = 125,000 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 9. Prior Gross Prot Table (1.20.21) Total Year Gross Prot 20X4 125,000 125,000

10. 20X4 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,125,000 125,000 = 1,000,000 11. 20X4 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) > 0 then: Debit Credit 12/31/XX Construction In Process (1.20.1) (1.20.20) Construction Expenses (1.20.2) (1.20.22) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X4 Construction In Process (1.20.1) 125,000 Construction Expenses (1.20.2) 1,000,000 Construction Revenues (1.20.7) 1,125,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) balance 1,125,000 12. 20X5 Prior Costs (1.20.12) Let f = The construction project rst year. Let p = The construction project previous year. Prior Costs = Let f = 20X4. Let p = 20X4.
p i=f

Period Costi

Prior Costs = 1,000,000 13. 20X5 Costs So Far (1.20.14) Costs So Far = Prior Costs (1.20.12) + Current Period Costs Costs So Far = 1,000,000 + (2,916,000 1,000,000) = 2,916,000 14. 20X5 Total Costs Estimate (1.20.15) Total Costs Estimate = Costs So Far (1.20.14) + Remaining Costs Estimate Total Costs Estimate = 2,916,000 + 1,640,250 = 4,556,250

1.9. INSTALLMENT SALES METHOD: SIMPLE 15. 20X5 Total Gross Prot Estimate (1.20.16) Total Gross Prot Estimate = Total Construction Revenues Total Costs Estimate (1.20.15) Total Gross Prot Estimate = 4,500,000 4,556,250 = -56,250 16. 20X5 Percent Complete (1.20.17) Costs So Far (1.20.14) Percent Complete = Total Costs Estimate (1.20.15) 2,916,000 Percent Complete = 4,556,250 = 0.64 17. 20X5 Construction Period Revenues (1.20.18) Construction Period Revenues = [Total Construction Revenues Percent Complete (1.20.17)] Total Prior Revenue Table (1.20.19 ) Construction Period Revenues = [4,500,000 0.64] 1,125,000 = 1,755,000 Add this periods revenue to the Prior Revenue Table (1.20.19). 18. Prior Revenue Table (1.20.19) Total Year Revenues 20X4 1,125,000 1,125,000 20X5 1,755,000 2,880,000 19. 20X5 Period Gross Prot (1.20.20) Since Total Gross Prot Estimate (1.20.16) < 0 then: Period Gross Prot = Total Gross Prot Estimate (1.20.16) Total Prior Gross Prot (1.20.21) Period Gross Prot = -56,250 125,000 = -181,250 Add this periods gross prot to the Prior Gross Prot Table (1.20.21). 20. Prior Gross Prot Table (1.20.21) Year Gross Prot Total 20X4 125,000 125,000 20X5 -181,250 -56,250 21. 20X5 Construction Period Expenses (1.20.22) Construction Period Expenses = Construction Period Revenues (1.20.18) Period Gross Prot (1.20.20) Construction Period Expenses = 1,755,000 -181,250 = 1,936,250 22. 20X5 Percent-of-Completion Revenues Journal Entry (1.20.23) Since Period Gross Prot (1.20.20) < 0 then: Debit Credit 12/31/XX Construction Expenses (1.20.2) (1.20.22) Construction In Process (1.20.1) (1.20.20) Construction Revenues (1.20.7) (1.20.18) Debit Credit 12/31/X5 Construction Expenses (1.20.2) 1,936,250 Construction In Process (1.20.1) 181,250 Construction Revenues (1.20.7) 1,755,000 Ledger Construction In Process 12/31/X4 1,000,000 (1.20.4) 12/31/X4 125,000 (1.20.23) 12/31/X5 1,916,000 (1.20.4) 12/31/X5 181,250 (1.20.23) balance 2,859,750

17

1.9

Installment Sales Method: Simple

Example 9, Installment Sales Method Relevant information:

18 20X0 Installment Sales $100,000 Cost of Installment Sales 50,000 Cash receipts on 20X0 sales 60,000 What amount of Net Accounts Receivable is reported? Solution 9: 1. 20X0 Installment Sales (1.21.2) XX/XX/XX

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Installment Accounts Receivable (1.21.1) Installment Sales Installment Accounts Receivable (1.21.1) Installment Sales

Debit Amount

Credit Amount Credit

12/31/X0

Debit 100,000

100,000

2. 20X0 Cost of Installment Sales (1.21.3) Journal Entry for Cost of Goods Sold XX/XX/XX Cost of Installment Sales Inventory Cost of Installment Sales Inventory Debit Book Value of Items Sold Credit 50,000 Credit Book Value of Items Sold

12/31/X0

Debit 50,000

3. 20X0 Cash Collection (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1) Debit Amount Credit

12/31/X0

Debit 60,000

Amount Credit 60,000

Add this cash collection to the Cash Collection Table (1.21.5). 4. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X0 60,000 5. 20X0 Installment Gross Prot (1.21.6) Installment Gross Prot = Installment Sales (1.21.2) Balance Cost of Installment Sales (1.21.3) Balance 20X0 Installment Gross Prot = 100,000 50,000 = 50,000 Closing Journal Entry Debit Credit 12/31/XX Installment Sales (1.21.2) (1.21.2) Balance Cost of Installment Sales (1.21.3) (1.21.3) Balance Deferred Gross Prot (1.1.19) (1.21.6) Debit Credit 12/31/X0 Installment Sales (1.21.2) 100,000 Cost of Installment Sales (1.21.3) 50,000 Deferred Gross Prot (1.1.19) 50,000 6. Gross Prot Margin Percentage for Year 20X0 (1.21.7) Gross Prot (1.21.6) Installment Gross Prot Margin Percentage = Installment Sales (1.21.2) 50,000 20X0 Installment Gross Prot Margin Percentage = 100,000 = 0.50 Add this years Gross Prot Margin Percentage to the Gross Prot Margin Percentage Table (1.21.8).

1.10. INSTALLMENT SALES METHOD: TRICKY 7. 20X0 Gross Prot Margin Percentage Table (1.21.8) Year Gross Prot Margin Percentage 20X0 0.50 8. 20X0 Realized Each Years Gross Prot (1.21.9) For each year y such that cash was collected this year for a sale made in year y: Realized Gross Prot Amount = Cash Collection for Sale Made In Year y (1.21.5) Gross Prot Margin Percentage for Year y (1.21.8) Journal Entry Debit Credit 12/31/XX Deferred Gross Prot (1.1.19) (1.21.9) Realized Gross Prot (1.1.21) (1.21.9) 20X0 Realized Gross Prot Amount = Cash Collection for Year 20X0 (1.21.5) Gross Prot Margin Percentage for Year 20X0 (1.21.8) 20X0 Realized Gross Prot Amount = 60,000 0.50 = 30,000 Journal Entry Debit Credit 12/31/X0 Deferred Gross Prot (1.1.19) 30,000 Realized Gross Prot (1.1.21) 30,000 9. Net Accounts Receivable (1.1.20) Net Accounts Receivable = Installment Accounts Receivable (1.21.1) Debit Balance Deferred Gross Prot (1.1.19) Credit Balance 20X0 Net Accounts Receivable = (100,000 60,000) (50,000 30,000) = $20,000

19

1.10

Installment Sales Method: Tricky

Example 10, Installment Sales Method When the collectibility of a business customers receivable becomes uncertain, the selling rm switches to the installment method of revenue recognition by closing the sales and cost of goods sold accounts, and establishing a deferred gross prot account. All such switches are made in the year of sale for this particular seller. The seller reported the following in its latest annual report. Although the seller sells dierent types of products, the gross margin percentage is relatively uniform across those products. Latest Income Statement Sales Revenue $400,000 (less) Cost of Goods Sold (1.1.14) (250,000) Gross Prot on Sales 150,000 (add) Realized Gross Prot 20,000 Gross Prot (1.1.16) 170,000 How much cash was collected on installment method receivables during the year? Solution 10: 1. Installment Gross Prot Margin Percentage (1.21.7) Installment Gross Prot (1.21.6) Installment Gross Prot Margin Percentage = Installment Sales (1.21.2) 150,000 Installment Gross Prot Margin Percentage = 400,000 = 0.375 2. Realized Each Years Gross Prot (1.21.9) For each year y such that cash was collected this year for a sale made in year y: Realized Gross Prot Amount = Cash Collection for Sale Made In Year y (1.21.5) Installment Gross Prot Margin Percentage for Year y (1.21.8) Realized Gross Prot Cash Collected for Sale Made = Installment Sales Gross Prot Percentage (1.21.7) 20,000 Cash Collected for Sale Made = 0.375 = 53,333

20

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

1.11

Installment Sales Method: Comprehensive


20X5 $250,000 190,000 100,000 100,000 20X6 $240,000 168,000 40,000 125,000 80,000

Example 11, Installment Sales Method Relevant information: 20X4 Installment Sales $200,000 Cost of Installment Sales 150,000 Cash receipts on 20X4 sales 60,000 Cash receipts on 20X5 sales Cash receipts on 20X6 sales

Prepare all the installment sales journal entries for three years. Solution 11: 1. 20X4 Installment Sales (1.21.2) XX/XX/XX Installment Accounts Receivable (1.21.1) Installment Sales Installment Accounts Receivable (1.21.1) Installment Sales Debit Amount Credit Amount Credit 200,000

12/31/X4

Debit 200,000

2. 20X4 Cost of Installment Sales (1.21.3) Journal Entry for Cost of Goods Sold XX/XX/XX Cost of Installment Sales Inventory Cost of Installment Sales Inventory Debit Book Value of Items Sold Credit 150,000 Debit Amount Credit Credit Book Value of Items Sold

12/31/X4

Debit 150,000

3. 20X4 Cash Collection (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1)

12/31/X4

Debit 60,000

Amount Credit 60,000

Add this cash collection to the Cash Collection Table (1.21.5). 4. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 60,000 5. 20X4 Installment Gross Prot (1.21.6) Installment Gross Prot = Installment Sales (1.21.2) Balance Cost of Installment Sales (1.21.3) Balance 20X4 Installment Gross Prot = 200,000 150,000 = 50,000 Closing Journal Entry Debit Credit 12/31/XX Installment Sales (1.21.2) (1.21.2) Balance Cost of Installment Sales (1.21.3) (1.21.3) Balance Deferred Gross Prot (1.1.19) (1.21.6) Debit Credit 12/31/X4 Installment Sales (1.21.2) 200,000 Cost of Installment Sales (1.21.3) 150,000 Deferred Gross Prot (1.1.19) 50,000 6. Gross Prot Margin Percentage for Year 20X4 (1.21.7) Gross Prot (1.21.6) Installment Gross Prot Margin Percentage = Installment Sales (1.21.2)

1.11. INSTALLMENT SALES METHOD: COMPREHENSIVE 50,000 20X4 Installment Gross Prot Margin Percentage = 200,000 = 0.25 Add this years Gross Prot Margin Percentage to the Gross Prot Margin Percentage Table (1.21.8). 7. 20X4 Gross Prot Margin Percentage Table (1.21.8) Year Gross Prot Margin Percentage 20X4 0.25 8. 20X4 Realized Each Years Gross Prot (1.21.9) For each year y such that cash was collected this year for a sale made in year y: Realized Gross Prot Amount = Cash Collection for Sale Made In Year y (1.21.5) Gross Prot Margin Percentage for Year y (1.21.8) Journal Entry Debit Credit 12/31/XX Deferred Gross Prot (1.1.19) (1.21.9) Realized Gross Prot (1.1.21) (1.21.9) 20X4 Realized Gross Prot Amount = Cash Collection for Year 20X4 (1.21.5) Gross Prot Margin Percentage for Year 20X4 (1.21.8) 20X4 Realized Gross Prot Amount = 60,000 0.25 = 15,000 Journal Entry Debit Credit 12/31/X4 Deferred Gross Prot (1.1.19) 15,000 Realized Gross Prot (1.1.21) 15,000 9. 20X4 Realized Gross Prot (1.1.21) = $15,000 10. 20X4 Installment Sales Closing Entry (1.21.10) 12/31/XX Realized Gross Prot (1.1.21) Income Summary Realized Gross Prot (1.1.21) Income Summary Debit (1.1.21) Balance Debit 15,000 Credit 15,000 Credit (1.1.21) Balance

21

12/31/X4

11. 20X4 Closing Cash Collection Table (1.21.11) Year Running Total Cash Collection 12. 20X5 Installment Sales (1.21.2) XX/XX/XX Installment Accounts Receivable (1.21.1) Installment Sales Installment Accounts Receivable (1.21.1) Installment Sales Debit Amount Credit Amount Credit 250,000

12/31/X5

Debit 250,000

13. 20X5 Cost of Installment Sales (1.21.3) Journal Entry for Cost of Goods Sold XX/XX/XX Cost of Installment Sales Inventory Cost of Installment Sales Inventory Debit Book Value of Items Sold Credit 190,000 Debit Amount Credit Amount Credit 100,000 Credit Book Value of Items Sold

12/31/X5

Debit 190,000

14. 20X5 Cash Collection for Year 20X4 (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1)

12/31/X5

Debit 100,000

22

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Add this cash collection to the Cash Collection Table (1.21.5). 15. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 100,000 16. 20X5 Cash Collection for Year 20X5 (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1) Debit Amount Credit Amount Credit 100,000

12/31/X5

Debit 100,000

Add this cash collection to the Cash Collection Table (1.21.5). 17. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 100,000 20X5 100,000 18. Gross Prot for Year 20X5 (1.21.6) Installment Gross Prot = Installment Sales (1.21.2) Balance Cost of Installment Sales (1.21.3) Balance Installment Gross Prot = 250,000 190,000 = 60,000 Closing Journal Entry Debit Credit 12/31/XX Installment Sales (1.21.2) (1.21.2) Balance Cost of Installment Sales (1.21.3) (1.21.3) Balance Deferred Gross Prot (1.1.19) (1.21.6) Debit Credit 12/31/X5 Installment Sales (1.21.2) 250,000 Cost of Installment Sales (1.21.3) 190,000 Deferred Gross Prot (1.1.19) 60,000 19. Gross Prot Margin Percentage for Year 20X5 (1.21.7) Gross Prot (1.21.6) Installment Gross Prot Margin Percentage = Installment Sales (1.21.2) 60,000 Installment Gross Prot Margin Percentage for Year 20X5 = 250,000 = 0.24 Add this years Gross Prot Margin Percentage to the Gross Prot Margin Percentage Table (1.21.8). 20. 20X5 Gross Prot Margin Percentage Table (1.21.8) Year Gross Prot Margin Percentage 20X4 0.25 20X5 0.24 21. 20X5 Realized Each Years Gross Prot (1.21.9) For each year y such that cash was collected this year for a sale made in year y: Realized Gross Prot Amount = Cash Collection for Sale Made In Year y (1.21.5) Gross Prot Margin Percentage for Year y (1.21.8) Journal Entry Debit Credit 12/31/XX Deferred Gross Prot (1.1.19) (1.21.9) Realized Gross Prot (1.1.21) (1.21.9) Realized Gross Prot Amount = Cash Collection for Year 20X4 (1.21.5) Gross Prot Margin Percentage for Year 20X4 (1.21.8) 20X4 Realized Gross Prot Amount = 100,000 0.25 = 25,000 Journal Entry

1.11. INSTALLMENT SALES METHOD: COMPREHENSIVE Debit Credit Deferred Gross Prot (1.1.19) 25,000 Realized Gross Prot (1.1.21) 25,000 20X5 Realized Gross Prot Amount = Cash Collection for Year 20X5 (1.21.5) Gross Prot Margin Percentage for Year 20X5 (1.21.8) 20X5 Realized Gross Prot Amount = 100,000 0.24 = 24,000 Journal Entry Debit Credit 12/31/X5 Deferred Gross Prot (1.1.19) 24,000 Realized Gross Prot (1.1.21) 24,000 12/31/X5 22. 20X5 Realized Gross Prot (1.1.21) = $49,000 23. 20X5 Installment Sales Closing Entry (1.21.10) 12/31/XX Realized Gross Prot (1.1.21) Income Summary Realized Gross Prot (1.1.21) Income Summary Debit (1.1.21) Balance Debit 49,000 Credit 49,000 Credit (1.1.21) Balance

23

12/31/X5

24. 20X5 Closing Cash Collection Table (1.21.11) Year Running Total Cash Collection 25. 20X6 Installment Sales (1.21.2) XX/XX/XX Installment Accounts Receivable (1.21.1) Installment Sales Installment Accounts Receivable (1.21.1) Installment Sales Debit Amount Credit Amount Credit 240,000

12/31/X6

Debit 240,000

26. 20X6 Cost of Installment Sales (1.21.3) Journal Entry for Cost of Goods Sold XX/XX/XX Cost of Installment Sales Inventory Cost of Installment Sales Inventory Debit Book Value of Items Sold Credit 168,000 Debit Amount Credit Credit Book Value of Items Sold

12/31/X6

Debit 168,000

27. 20X6 Cash Collection for Year 20X4 (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1)

12/31/X6

Debit 40,000

Amount Credit 40,000

Add this cash collection to the Cash Collection Table (1.21.5). 28. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 40,000 29. 20X6 Cash Collection for Year 20X5 (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1) Debit Amount Credit Amount Credit 125,000

12/31/X6

Debit 125,000

24

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Add this cash collection to the Cash Collection Table (1.21.5). 30. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 40,000 20X5 125,000 31. 20X6 Cash Collection for Year 20X6 (1.21.4) XX/XX/XX Cash (1.1.9) Installment Accounts Receivable (1.21.1) Cash (1.1.9) Installment Accounts Receivable (1.21.1) Debit Amount Credit

12/31/X6

Debit 80,000

Amount Credit 80,000

Add this cash collection to the Cash Collection Table (1.21.5). 32. Cash Collection Table (1.21.5) Year Running Total Cash Collection 20X4 40,000 20X5 125,000 20X6 80,000 33. Gross Prot for Year 20X6 (1.21.6) Installment Gross Prot = Installment Sales (1.21.2) Balance Cost of Installment Sales (1.21.3) Balance Installment Gross Prot = 240,000 168,000 = 72,000 Closing Journal Entry Debit Credit 12/31/XX Installment Sales (1.21.2) (1.21.2) Balance Cost of Installment Sales (1.21.3) (1.21.3) Balance Deferred Gross Prot (1.1.19) (1.21.6) Debit Credit 12/31/X6 Installment Sales (1.21.2) 240,000 Cost of Installment Sales (1.21.3) 168,000 Deferred Gross Prot (1.1.19) 72,000 34. Gross Prot Margin Percentage for Year 20X6 (1.21.7) Gross Prot (1.21.6) Installment Gross Prot Margin Percentage = Installment Sales (1.21.2) 72,000 Installment Gross Prot Margin Percentage = 240,000 = 0.30 Add this years Gross Prot Margin Percentage to the Gross Prot Margin Percentage Table (1.21.8). 35. 20X6 Gross Prot Margin Percentage Table (1.21.8) Year Gross Prot Margin Percentage 20X4 0.25 20X5 0.24 20X6 0.30 36. 20X6 Realized Each Years Gross Prot (1.21.9) For each year y such that cash was collected this year for a sale made in year y: Realized Gross Prot Amount = Cash Collection for Sale Made In Year y (1.21.5) Gross Prot Margin Percentage for Year y (1.21.8) Journal Entry Debit Credit 12/31/XX Deferred Gross Prot (1.1.19) (1.21.9) Realized Gross Prot (1.1.21) (1.21.9) 20X4 Realized Gross Prot Amount = Cash Collection for Year 20X4 (1.21.5) Gross Prot Margin Percentage for Year 20X4 (1.21.8)

1.12. COST RECOVERY METHOD 20X4 Realized Gross Prot Amount = 40,000 0.25 = 10,000 Journal Entry Debit Credit 12/31/X6 Deferred Gross Prot (1.1.19) 10,000 Realized Gross Prot (1.1.21) 10,000 20X5 Realized Gross Prot Amount = Cash Collection for Year 20X5 (1.21.5) Gross Prot Margin Percentage for Year 20X5 (1.21.8) 20X5 Realized Gross Prot Amount = 125,000 0.24 = 30,000 Journal Entry Debit Credit 12/31/X6 Deferred Gross Prot (1.1.19) 30,000 Realized Gross Prot (1.1.21) 30,000 20X6 Realized Gross Prot Amount = Cash Collection for Year 20X6 (1.21.5) Gross Prot Margin Percentage for Year 20X6 (1.21.8) 20X6 Realized Gross Prot Amount = 80,000 0.30 = 24,000 Journal Entry Debit Credit 12/31/X6 Deferred Gross Prot (1.1.19) 24,000 Realized Gross Prot (1.1.21) 24,000 37. 20X6 Realized Gross Prot (1.1.21) = $64,000 38. 20X6 Installment Sales Closing Entry (1.21.10) 12/31/XX Realized Gross Prot (1.1.21) Income Summary Realized Gross Prot (1.1.21) Income Summary Debit (1.1.21) Balance Debit 64,000 Credit 64,000 Credit (1.1.21) Balance

25

12/31/X6

39. 20X6 Closing Cash Collection Table (1.21.11) Year Running Total Cash Collection

1.12

Cost Recovery Method

Example 12, Cost Recovery Method Sales Price 1/1/X4 = 36,000. Cost 1/1/X4 = 25,000. Cash Collection 1/1/X4 = 18,000. Cash Collection 1/1/X5 = 12,000. Cash Collection 1/1/X6 = 6,000. Prepare all the cost recovery method journal entries for three years. Solution 12: 1. Gross Prot Amount (1.23.1) Gross Prot Amount = Sales Price Cost Gross Prot Amount = 36,000 25,000 = 11,000 2. Cost Recovery Sales Transaction (1.23.2) XX/XX/XX Accounts Receivable (1.1.11) Inventory Deferred Gross Prot (1.1.19) Accounts Receivable (1.1.11) Inventory Deferred Gross Prot (1.1.19) Debit Sales Price Credit Cost Gross Prot Amount (1.23.1) Credit 25,000 11,000

01/01/X4

Debit 36,000

26

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Add this transaction to the Cost Recovery Table (1.23.3) with the Cost entered in the Unrecovered Cost column. 3. Cost Recovery Table (1.23.3) Date Cash Received Unrecovered Cost Realized Gross Prot XX/XX/XX 0 Cost 0 Date Cash Received Unrecovered Cost Realized Gross Prot 01/01/X4 0 25,000 0 4. Cost Recovery Cash Receipt (1.23.4) XX/XX/XX Cash (1.1.9) Accounts Receivable (1.1.11) Cash (1.1.9) Accounts Receivable (1.1.11) Debit Cash Received Credit 18,000 Credit Cash Received

01/01/X4

Debit 18,000

5. Cost Recovery Cash Receipt: Cost Recovery Table (1.23.5) Since Cash Received < Unrecovered Cost then: (a) New Unrecovered Cost = Unrecovered Cost Cash Received (b) New Realized Gross Prot = 0 (a) New Unrecovered Cost = 25,000 18,000 = 7,000 (b) New Realized Gross Prot = 0 Cost Recovery Table Date Cash Received Unrecovered Cost Realized Gross Prot XX/XX/XX 0 Cost 0 XX/XX/XX Cash Received New Unrecovered Cost New Realized Gross Prot Date Cash Received Unrecovered Cost Realized Gross Prot 01/01/X4 0 25,000 0 01/01/X4 18,000 7,000 0 6. Cost Recovery Cash Receipt (1.23.4) XX/XX/XX Cash (1.1.9) Accounts Receivable (1.1.11) Cash (1.1.9) Accounts Receivable (1.1.11) Debit Cash Received Credit 12,000 Credit Cash Received

01/01/X5

Debit 12,000

7. Cost Recovery Cash Receipt: Cost Recovery Table (1.23.5) Since Cash Received >= Unrecovered Cost then: (a) New Unrecovered Cost = 0 (b) New Realized Gross Prot = Cash Received Unrecovered Cost (a) New Unrecovered Cost = 0 (b) New Realized Gross Prot = 12,000 7,000 = 5,000 Cost Recovery Table Date Cash Received Unrecovered Cost Realized Gross Prot XX/XX/XX 0 Cost 0 XX/XX/XX Cash Received New Unrecovered Cost New Realized Gross Prot Date Cash Received Unrecovered Cost Realized Gross Prot 01/01/X4 0 25,000 0 01/01/X4 18,000 7,000 0 01/01/X5 12,000 0 5,000

1.12. COST RECOVERY METHOD 8. Cost Recovery Cash Receipt: Realize Gross Prot Journal Entry (1.23.6) Since New Realized Gross Prot > 0 then: Debit Credit XX/XX/XX Deferred Gross Prot (1.1.19) New Realized Gross Prot Realized Gross Prot (1.1.21) New Realized Gross Prot Debit Credit 01/01/X5 Deferred Gross Prot (1.1.19) 5,000 Realized Gross Prot (1.1.21) 5,000 9. Cost Recovery Closing Entry (1.23.7) After printing the nancial statements, then: 12/31/XX Realized Gross Prot (1.1.21) Income Summary Realized Gross Prot (1.1.21) Income Summary Debit (1.1.21) Balance Debit 5,000 Credit 5,000 Credit Cash Received Credit (1.1.21) Balance

27

12/31/X5

10. Cost Recovery Cash Receipt (1.23.4) XX/XX/XX Debit Cash (1.1.9) Cash Received Accounts Receivable (1.1.11) Debit Credit Cash (1.1.9) 6,000 Accounts Receivable (1.1.11) 6,000

01/01/X6

11. Cost Recovery Cash Receipt: Cost Recovery Table (1.23.5) Since Cash Received >= Unrecovered Cost then: (a) New Unrecovered Cost = 0 (b) New Realized Gross Prot = Cash Received Unrecovered Cost (a) New Unrecovered Cost = 0 (b) New Realized Gross Prot = 6,000 0 = 6,000 Cost Recovery Table Date Cash Received Unrecovered Cost Realized Gross Prot XX/XX/XX 0 Cost 0 XX/XX/XX Cash Received New Unrecovered Cost New Realized Gross Prot Date Cash Received Unrecovered Cost Realized Gross Prot 01/01/X4 0 25,000 0 01/01/X4 18,000 7,000 0 01/01/X5 12,000 0 5,000 01/01/X6 6,000 0 6,000 12. Cost Recovery Cash Receipt: Realize Gross Prot Journal Entry (1.23.6) Since New Realized Gross Prot > 0 then: Debit Credit XX/XX/XX Deferred Gross Prot (1.1.19) New Realized Gross Prot Realized Gross Prot (1.1.21) New Realized Gross Prot Debit Credit 01/01/X6 Deferred Gross Prot (1.1.19) 6,000 Realized Gross Prot (1.1.21) 6,000 13. Cost Recovery Closing Entry (1.23.7) After printing the nancial statements, then: 12/31/XX Realized Gross Prot (1.1.21) Income Summary Realized Gross Prot (1.1.21) Income Summary Debit (1.1.21) Balance Debit 6,000 Credit 6,000 Credit (1.1.21) Balance

12/31/X6

28

CHAPTER 1. REVENUES AND RECEIVABLES EXAMPLES

Chapter 2

Inventory Examples
2.1 Basic Inventory Identity: Simple

Example 13: Basic Inventory Identity Data for a rms inventory system for the current year follows: Beginning inventory = $600 Purchases = $8,000 Ending inventory = $900 Purchases returns and allowances = $600 Transportation-in = $500 Transportation-out = $700 Interest expensed on debt incurred to acquire inventory = $1,000 What is the cost of goods sold? Solution 13: 1. Basic Inventory Identity for Merchandising (2.1) Goods Available for Sale = + Beginning Inventory 600 + Purchases 8,000 + Freight-in 500 Purchase Returns and Allowances for Defects 600 Slippage 0 Goods Available for Sale = 8,500 Cost of Goods Sold = + Goods Available for Sale 8,500 Ending Inventory 900 Cost of Goods Sold = 7,600

2.2

LIFO Periodic

Example 14: LIFO Periodic Tricky A LIFO rm purchased 1,000 units during the current year but sold 1,100 units. The beginning inventory at 1/1/X3 had two layers: (1) most recent layer: 50 units @ $2 each, (2) earlier layer: 230 units @ $1.50 each. The tax rate is 30%. The replacement cost of inventory at year-end was $4 per unit. Compute the tax increase caused by the LIFO liquidation. Solution 14: 1. Periodic LIFO Purchases Journal Table (2.3.2): Beginning of Year Purchases Journalitem Date Quantity Purchased $Cost Per Item Quantity Remaining 1/1/X1 ??? 1.50 230 1/1/X2 ??? 2.00 50 2. Beginning Inventory Valueitem Let n = the number of layers. n Beginning Inventory Value = i=1 Cost Per Itemi Quantity Remainingi Beginning Inventory Value = (1.50 230) + (2.00 50) = 445 29

30

CHAPTER 2. INVENTORY EXAMPLES 3. Periodic LIFO Purchases Journal Table (2.3.2): After Current-Year Purchase Purchases Journalitem Date Quantity Purchased $Cost Per Item Quantity Remaining 1/1/X1 ??? 1.50 230 ??? 2.00 50 1/1/X2 1/1/X3 1,000 4.00 1,000 4. Quantity Available For Saleitem (2.3.3) Let n = the number of layers. n Quantity Available For Sale = i=1 Quantity Remainingi Quantity Available For Sale = 230 + 50 + 1,000 = 1,280 5. Ending Inventory Quantityitem (2.3.1) At year end, take a physical inventory count of this inventory item. Ending Inventory Quantity = 230 + 50 + 1,000 1,100 = 180 ( computed) 6. Quantity Solditem (2.3.4) Quantity Sold = Quantity Available For Sale (2.3.3) Ending Inventory Quantity (2.3.1) Quantity Sold = 1,100 ( given) 7. Quantity Remaining Reduction Algorithm (2.3.5) 1 Total Quantity Remaining = Quantity Sold (2.3.4) 2 For L in each layer from bottom to top: If Quantity RemainingL = 0 then: Do nothing If Quantity RemainingL < Total Quantity Remaining then: Total Quantity Remaining = Total Quantity Remaining Quantity RemainingL Quantity RemainingL = 0 If Quantity RemainingL >= Total Quantity Remaining then: Quantity RemainingL = Quantity RemainingL Total Quantity Remaining Goto Ending Inventory Value (2.3.6) Periodic LIFO Purchases Journal Table (2.3.2) Purchases Journalitem Date Quantity Purchased $Cost Per Item Quantity Remaining 12/31/X1 ??? 1.50 230 180 12/31/X2 ??? 2.00 50 0 12/31/X3 1,000 4.00 1,000 0 8. Ending Inventory Valueitem (2.3.6): With Liquidation Let n = the number of layers. n Ending Inventory Value = i=1 Cost Per Itemi Quantity Remainingi Ending Inventory Value = (1.50 180) + (2.00 0) + (4.00 0) = 270 9. Basic Inventory Identity for Merchandising (2.1): With Liquidation Goods Available for Sale = + Beginning Inventory 445 + Purchases 4,000 + Freight-in 0 Purchase Returns and Allowances for Defects 0 Slippage 0 Goods Available for Sale = 4,445 Cost of Goods Sold = + Goods Available for Sale 4,445 Ending Inventory 270 Cost of Goods Sold = 4,175

10. Cost of Goods Sold: Without Liquidation Cost of Goods Sold = 1,100 4.00 = 4,400 11. Tax Increase Tax Increase = [Cost of Goods Sold: Without Liquidation Cost of Goods Sold: With Liquidation] Tax Rate Tax Increase = [4,400 4,175] 0.30 = 67.50

2.3. DOLLAR VALUE LIFO: SIMPLE

31

2.3

Dollar Value LIFO: Simple

Example 15: Dollar Value LIFO A rm adopted LIFO for external reporting at the beginning of 20X1. There was one layer of inventory at that time costing $2,000. The price level was set at 1.00 for that layer. The rm uses FIFO for internal purposes. Ending inventory for the current year under FIFO is $3,300 and the price level index for that inventory is 1.10. The rm purchased a total of $23,000 of inventory during the year. Using DV LIFO, what is cost of goods sold for 20X1. Solution 15: 1. Dollar 1 Year 20X0 20X1 2 Year 20X0 20X1 4 Value LIFO Alogrithm (2.7.4): 20X1 YearCurrentY ear = The current year $Current Index $Base Base Current 2,000 1.00 2,000 0 0

$DVLIFO Cost 2,000

$CurrentCurrentY ear = Ending Inventory at Current Costs (2.7.1) $Current Index $Base Base Current $DVLIFO Cost 2,000 1.00 2,000 0 0 2,000 3,300 Since CurrentYear > Base Year then: IndexCurrentY ear = IndexCurrentY ear1 + Ination Rate $BaseCurrentY ear = $CurrentCurrentY ear IndexCurrentY ear Year $Current Index $Base Base Current $DVLIFO Cost 20X0 2,000 1.00 2,000 0 0 2,000 20X1 3,300 1.10 3,000 Base = $BaseCurrentY ear $BaseCurrentY ear1 Base = 3,000 2,000 = 1,000 Since Base >= 0 then: BaseCurrentY ear = Base Year $Current Index $Base Base Current $DVLIFO Cost 20X0 2,000 1.00 2,000 0 0 2,000 20X1 3,300 1.10 3,000 1,000 4.1 CurrentCurrentY ear = BaseCurrentY ear IndexCurrentY ear Year $Current Index $Base Base Current $DVLIFO Cost 20X0 2,000 1.00 2,000 0 0 2,000 20X1 3,300 1.10 3,000 1,000 1,100 4.2 For L in each layer from second year down to the current year: $DVLIFO CostL = $DVLIFO CostL1 + CurrentL Year $Current Index $Base Base Current $DVLIFO Cost 20X0 2,000 1.00 2,000 0 0 2,000 20X1 3,300 1.10 1,000 1,000 1,100 3,100 5 Use $DVLIFO CostCurrentY ear as the Ending Inventory at DV LIFO Cost Ending Inventory at Dollar Value LIFO for 20X1 = 3,100

2. Basic Inventory Identity for Merchandising (2.1) Goods Available for Sale = + Beginning Inventory 2,000 + Purchases 23,000 + Freight-in 0 Purchase Returns and Allowances for Defects 0 Slippage 0 Goods Available for Sale = 25,000 Cost of Goods Sold = + Goods Available for Sale 25,000 Ending Inventory 3,100 Cost of Goods Sold = 21,900

2.4

Dollar Value LIFO: Comprehensive

Example 16: Dollar Value LIFO Bismark Company compiled the following ending inventory information:

32

CHAPTER 2. INVENTORY EXAMPLES

December 31 20X1 20X2 20X3 20X4 What What What What is is is is ending ending ending ending

$Current 200,000 299,000 300,000 351,000 inventory inventory inventory inventory at at at at

Ination 0.15 0.05 0.10 Dollar Dollar Dollar Dollar Value Value Value Value LIFO LIFO LIFO LIFO for for for for 20X1? 20X2? 20X3? 20X4?

Solution 16: 1. Dollar 1 Year 20X1 2 Year 20X1 3 Value LIFO Alogrithm (2.7.4): 20X1 YearCurrentY ear = The current year $Current Index $Base Base Current

$DVLIFO Cost

$CurrentCurrentY ear = Ending Inventory at Current Costs (2.7.1) $Current Index $Base Base Current $DVLIFO Cost 200,000 Since CurrentYear = Base Year then: IndexCurrentY ear = 1.00 $BaseCurrentY ear = $CurrentCurrentY ear BaseCurrentY ear = 0 CurrentCurrentY ear = 0 $DVLIFO CostCurrentY ear = $CurrentCurrentY ear Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 5 Use $DVLIFO CostCurrentY ear as the Ending Inventory at DV LIFO Cost Ending Inventory at Dollar Value LIFO for 20X1 = 200,000 Value LIFO Alogrithm (2.7.4): 20X2 YearCurrentY ear = The current year $Current Index $Base Base Current 200,000 1.00 200,000 0 0

2. Dollar 1 Year 20X1 20X2 2 Year 20X1 20X2 4

$DVLIFO Cost 200,000

Year 20X1 20X2

Year 20X1 20X2 4.1 Year 20X1 20X2

$CurrentCurrentY ear = Ending Inventory at Current Costs (2.7.1) $Current Index $Base Base Current $DVLIFO Cost 200,000 1.00 200,000 0 0 200,000 299,000 Since CurrentYear > Base Year then: IndexCurrentY ear = IndexCurrentY ear1 + Ination Rate $BaseCurrentY ear = $CurrentCurrentY ear IndexCurrentY ear $Current Index $Base Base Current $DVLIFO Cost 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 Base = $BaseCurrentY ear $BaseCurrentY ear1 Base = 260,000 200,000 = 60,000 Since Base >= 0 then: BaseCurrentY ear = Base $Current Index $Base Base Current $DVLIFO Cost 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 60,000 CurrentCurrentY ear = BaseCurrentY ear IndexCurrentY ear $Current Index $Base Base Current $DVLIFO Cost 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 60,000 69,000

2.4. DOLLAR VALUE LIFO: COMPREHENSIVE For L in each layer from second year down to the current year: $DVLIFO CostL = $DVLIFO CostL1 + CurrentL $Base Base Current $DVLIFO Cost Year $Current Index 20X1 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 60,000 69,000 269,000 20X2 5 Use $DVLIFO CostCurrentY ear as the Ending Inventory at DV LIFO Cost Ending Inventory at Dollar Value LIFO for 20X2 = 269,000 3. Dollar 1 Year 20X1 20X2 20X3 2 Year 20X1 20X2 20X3 4 Value LIFO Alogrithm (2.7.4): 20X3 YearCurrentY ear = The current year $Current Index $Base Base Current 200,000 1.00 200,000 0 0 299,000 1.15 260,000 60,000 69,000 4.2

33

$DVLIFO Cost 200,000 269,000

$CurrentCurrentY ear = Ending Inventory at Current Costs (2.7.1) $Current Index $Base Base Current $DVLIFO Cost 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 60,000 69,000 269,000 300,000 Since CurrentYear > Base Year then: IndexCurrentY ear = IndexCurrentY ear1 + Ination Rate $BaseCurrentY ear = $CurrentCurrentY ear IndexCurrentY ear Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 69,000 269,000 20X3 300,000 1.20 250,000 Base = $BaseCurrentY ear $BaseCurrentY ear1 Base = 250,000 260,000 = -10,000 Since Base < 0 then: Peel O = | Base | Peel O = 10,000 For L in each layer from the previous year up to the second year: Since BaseL > Peel O then: BaseL = BaseL Peel O CurrentL = BaseL IndexL Goto 4.2 Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 20X3 300,000 1.20 250,000 4.2 For L in each layer from second year down to the current year: $DVLIFO CostL = $DVLIFO CostL1 + CurrentL Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X3 300,000 1.20 250,000 257,500 5 Use $DVLIFO CostCurrentY ear as the Ending Inventory at DV LIFO Cost Ending Inventory at Dollar Value LIFO for 20X3 = 257,500 Value LIFO Alogrithm (2.7.4): 20X4 YearCurrentY ear = The current year $Current Index $Base Base 200,000 1.00 200,000 0 299,000 1.15 260,000 60,000 50,000 300,000 1.20 250,000

4. Dollar 1 Year 20X1 20X2 20X3 20X4 2

Current 0 69,000 57,500

$DVLIFO Cost 200,000 269,000 257,500 257,500

$CurrentCurrentY ear = Ending Inventory at Current Costs (2.7.1)

34

CHAPTER 2. INVENTORY EXAMPLES Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X3 300,000 1.20 250,000 257,500 351,000 20X4 4 Since CurrentYear > Base Year then: IndexCurrentY ear = IndexCurrentY ear1 + Ination Rate $BaseCurrentY ear = $CurrentCurrentY ear IndexCurrentY ear $Base Base Current $DVLIFO Cost Year $Current Index 20X1 200,000 1.00 200,000 0 0 200,000 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X2 20X3 300,000 1.20 250,000 257,500 20X4 351,000 1.30 270,000 Base = $BaseCurrentY ear $BaseCurrentY ear1 Base = 270,000 250,000 = 20,000 Since Base >= 0 then: BaseCurrentY ear = Base $Base Base Current $DVLIFO Cost Year $Current Index 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X3 300,000 1.20 250,000 257,500 20X4 351,000 1.30 270,000 20,000 4.1 CurrentCurrentY ear = BaseCurrentY ear IndexCurrentY ear $Base Base Current $DVLIFO Cost Year $Current Index 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X3 300,000 1.20 250,000 257,500 351,000 1.30 270,000 20,000 26,000 20X4 4.2 For L in each layer from second year down to the current year: $DVLIFO CostL = $DVLIFO CostL1 + CurrentL Year $Current Index $Base Base Current $DVLIFO Cost 20X1 200,000 1.00 200,000 0 0 200,000 20X2 299,000 1.15 260,000 60,000 50,000 69,000 57,500 269,000 257,500 20X3 300,000 1.20 250,000 257,500 20X4 351,000 1.30 270,000 20,000 26,000 283,500 5 Use $DVLIFO CostCurrentY ear as the Ending Inventory at DV LIFO Cost Ending Inventory at Dollar Value LIFO for 20X4 = 283,500

2.5. ABSORPTION COSTING METHOD OF PROCESS COSTING FIRM

35

2.5

Absorption Costing Method of Process Costing Firm

Example 17 Data for a manufacturing rms inventory system for the current year follows: Beginning Direct Materials Inventory = $40,000 Ending Inventory Valuation of Direct Materials Inventory = $50,000 Beginning Work In Process Inventory = $10,000 Ending Inventory Valuation of Work In Process Inventory = $14,000 Beginning Finished Goods Inventory = $100,000 Ending Inventory Valuation of Finished Goods Inventory = $150,000 Plant Expenses = $214,000 Direct Materials Purchases = $460,000 Direct Labor = $300,000 What is the product cost? What is the end-of-year close of work-in-process inventory? What is the Schedule of Cost of Goods Manufactured? What is the cost of goods sold journal entry? Solution 17: 1. Inventory Ledgers Direct Materials Inventory Beginning 40,000 Work In Process Inventory Beginning 10,000 Finished Goods Inventory Beginning 100,000 2. Plant Expenses Ledger (2.9.8) Plant Expenses 214,000 3. Direct Materials Purchases Ledger (2.10.2) Direct Materials Purchases 460,000 4. Direct Labor Ledger (2.10.4) Direct Labor Inventory 300,000 5. Direct Materials Used (2.11.3) Direct Materials Used = + Direct Materials Inventory (2.10.1) Beginning Balance + Direct Materials Purchases (2.10.2) Debit Balance Ending Inventory Valuation (2.11.2) Direct Materials Used = 6. End-Of-Year Close of Direct Materials Inventory (2.11.4) Debit Credit 12/31/XX Direct Materials Inventory (2.10.1) 460,000 Direct Materials Purchases (2.10.1) 460,000 Debit Credit 12/31/XX Work In Process Inventory (2.10.5) 450,000 Direct Materials Inventory (2.10.1) 450,000 Ledgers Direct Materials Inventory Beginning 40,000 460,000 450,000 Balance 50,000 40,000 460,000 50,000 450,000

36 Work In Process Inventory Beginning 10,000 450,000 Balance 460,000

CHAPTER 2. INVENTORY EXAMPLES

7. End-Of-Year Close To Manufacturing Overhead Inventory (2.11.5) Debit Credit 12/31/XX Manufacturing Overhead Inventory (2.10.6) 214,000 Plant Expenses 214,000 Ledgers Manufacturing Overhead Inventory Beginning 0 214,000 Balance 214,000 Plant Expenses 214,000 214,000 Balance 0 8. Cost of Goods Manufactured (2.11.7) Cost of Goods Manufactured = + Work In Process Inventory (2.10.5) Beginning Balance + Direct Materials Used (2.11.3) + Manufacturing Overhead Inventory (2.10.6) Debit Balance + Direct Labor Inventory (2.10.4) Debit Balance Work In Process Ending Inventory Valuation Cost of Goods Manufactured = 9. Product Cost (2.11.8) Product Cost = + Direct Materials Used (2.11.3) 450,000 + Direct Labor Inventory (2.10.4) Debit Balance 300,000 + Manufacturing Overhead Inventory (2.10.6) Debit Balance 214,000 Product Cost = 964,000 10. End-Of-Year Close Direct Labor Inventory (2.12.2) 12/31/XX Work In Process Inventory (2.10.5) Direct Labor Inventory (2.10.4) Work In Process Inventory (2.10.5) Direct Labor Inventory (2.10.4) Debit (2.10.4) Debit Balance Debit 300,000 Credit 300,000 Credit (2.10.4) Debit Balance 10,000 450,000 214,000 300,000 14,000 960,000

12/31/XX Ledgers

Direct Labor Inventory 300,000 300,000 Balance 0 Work In Process Inventory Beginning 10,000 450,000 300,000 Balance 760,000 11. End-Of-Year Close Of Manufacturing Overhead Inventory (2.12.3) 12/31/XX Work In Process Inventory (2.10.5) Manufacturing Overhead Inventory (2.10.6) Work In Process Inventory (2.10.5) Manufacturing Overhead Inventory (2.10.6) Debit (2.10.6) Debit Balance Debit 214,000 Credit 214,000 Credit (2.10.6) Debit Balance

12/31/XX

2.5. ABSORPTION COSTING METHOD OF PROCESS COSTING FIRM Ledgers Manufacturing Overhead Inventory Beginning 0 214,000 214,000 Balance 0 Work In Process Inventory Beginning 10,000 450,000 300,000 214,000 Balance 974,000 12. End-Of-Year Close Of Work In Process Inventory (2.12.4) 12/31/XX Finished Goods Inventory (2.11.1) Work In Process Inventory (2.10.5) Finished Goods Inventory (2.11.1) Work In Process Inventory (2.10.5) Debit Cost of Goods Manufactured (2.11.7) Debit 960,000 Credit 960,000 Credit (2.11.7)

37

12/31/XX Ledgers

Finished Goods Inventory Beginning 100,000 960,000 Balance 1,060,000 Work In Process Inventory Beginning 10,000 450,000 300,000 214,000 960,000 Balance 14,000 13. Schedule of Cost of Goods Manufactured (2.12) Schedule of Cost of Goods Manufactured For the Year Ended 12/31/XX Direct Materials Beginning Inventory Direct Materials (2.10.1) Beginning Balance (1) (Add) Purchases Direct Materials Purchases (2.10.2) Debit Balance (2) Cost of Direct Materials Available for Use (1) + (2) (Less) Ending Inventory Inventory Valuation (2.11.2) Direct Materials Direct Materials Used (2.11.3) Direct Labor Direct Labor Inventory (2.10.4) Debit Balance Indirect Manufacturing Costs Overhead Inventory (2.10.6) Debit Balance Product Cost Product Cost (2.11.8) (1) (Add) Beginning Work In Process Work In Process (2.10.5) Beginning Balance (2) Total Manufacturing Costs To Account For (1) + (2) (Less) Ending Work In Process Inventory Ending Inventory Valuation (2.11.6) Cost of Goods Manufactured Cost of Goods Manufactured (2.11.7) 14. Cost of Goods Sold Calculation (2.12.5) Cost of Goods Sold = + Finished Goods Inventory (2.11.1) Beginning Balance + Cost Of Goods Manufactured (2.11.7) Finished Goods Inventory Ending Inventory Valuation Cost of Goods Sold = 15. Cost of Goods Sold Journal Entry (2.12.6)

40,000 460,000 500,000 50,000 450,000 300,000 214,000 964,000 10,000 974,000 14,000 960,000

100,000 960,000 150,000 910,000

38

CHAPTER 2. INVENTORY EXAMPLES Debit Cost of Goods Sold Calculation (2.12.5) Debit 910,000 Credit 910,000 Credit (2.12.5)

12/31/XX

Cost of Goods Sold (1.1.14) Finished Goods Inventory (2.11.1) Cost of Goods Sold (1.1.14) Finished Goods Inventory (2.11.1)

12/31/XX Ledger

Finished Goods Inventory Beginning 100,000 960,000 910,000 Balance 150,000

Chapter 3

Property Plant and Equipment Examples


3.1 Self-constructed Asset

Example 18: Self-constructed Asset A rm successfully completed the construction of its new retail outlet. Total incurred costs include: Materials = $200,000 Labor = $400,000 Incremental overhead = $120,000 Capitalized interest per FAS 34 = $20,000 Market value upon completion = $730,000 What amount of loss should be recognized as a result of this construction? Solution 18: 1. Asset Cost (3.5.1) Asset Cost = Materials + Labor + Incremental Overhead + Capitalized Interest (3.6) Asset Cost = 200,000 + 400,000 + 120,000 + 20,000 = 740,000 2. Self-contructed Asset Journal Entry (3.5.2) Since Asset Cost (3.5.1) > Cost If Outsourced then: (Loss) Amount = Cost If Outsourced Asset Cost (3.5.1) (Loss) Amount = 730,000 740,000 = -10,000 Debit XX/XX/XX Assetitem Cost If Outsourced Loss on Self-constructed Asset (Loss) Amount Cash and/or Liability Debit Credit XX/XX/XX Retail Outlet 730,000 Loss on Self-constructed Asset 10,000 Cash and/or Liability 740,000

Credit

Asset Cost (3.5.1)

3.2

Impairment Loss

Example 19: Impairment Loss Year-end data on a plant asset currently in use is as follows: Remaining useful life = 4 years Book value = $96,000 Annual estimated gross cash inows = $23,000 Annual estimated maintenance and other costs = $3,000 Estimated residual (market) value at end of current year = $40,000 Estimated residual (market) value four years from end of current year = $6,000 What amount of impairment loss is recorded on this asset at the end of the current year? 39

40

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES

Solution 19: 1. Equipment Recoverability (3.13.1) n Equipment Recoverability = i=1 Undiscounted Expected Future Net Cash Inowi OR Equipment Recoverability = Remaining Useful Life Years [Estimated Annual Cash Inow Estimated Annual Maintenance Costs] + Estimated Residual Value Equipment Recoverability = 4 [23,000 3,000] + 6,000 = 86,000 2. Recoverability Test (3.13.2) If Equipment Recoverability (3.13.1) < Book Value (3.11.4) then: impaired If Equipment Recoverability (3.13.1) >= Book Value (3.11.4) then: not impaired Since 86,000 < 96,000 then: impaired 3. (Loss) on Impairment, If Continued Use (3.13.3) (Loss) on Impairment If Continued Use = Fair Value ( if known) Book Value (3.11.4) or Equipment Recoverability (3.13.1) Book Value (3.11.4) (Loss) on Impairment If Continued Use = 40,000 96,000 = -54,000

3.3

Natural Resources Depletion

Example 20: Natural Resources Depletion MineCo Inc. started a natural resource exploitation venture this year. The mine is expected to yield 1 million tons of ore. Relevant data for this year: Cost to acquire and develop the mineral rights = $900,000 Exploration costs = $2,100,000 Extraction costs = $500,000 Ore extracted = 200,000 tons Sold = $0 Compute the ending balance in the inventory account using the full costing method (in millions). Note: use 12/31/X1 for all journal entries. Solution 20: 1. Acquistion Costs (3.14.1) Since Purchased Property then: Propertyitem (3.1) Cash and/or Liability Development Costs (3.14.5) Since Purchased Property then: XX/XX/XX XX/XX/XX Debit (3.1.6) Credit (3.1.6)

12/31/X1

Debit Propertyitem (3.1) Cost Amount Cash and/or Liability Debit Credit Mine 900,000 Cash 900,000

Credit Cost Amount

2. Exploration: Full Cost (3.14.4) Whether Successful or Not and Purchased Property: Debit Credit XX/XX/XX Propertyitem (3.1) Cost Amount Cash and/or Liability Cost Amount

3.4. NATURAL RESOURCES RESTORATION Debit 2,100,000 Credit 2,100,000 Debit Cost Amount Credit 500,000 Credit Cost Amount

41

12/31/X1

Mine Cash

3. Production Costs (3.14.6) XX/XX/XX Inventoryitem Cash and/or Liability Debit Ore Inventory 500,000 Cash

12/31/X1 Ledger

Ore Inventory 12/31/X1 500,000 balance 500,000 4. Capitalized Costs (3.14.13) Capitalized Costs = + Acquisition (3.14.1) and Development (3.14.5) + Exploration Costs (3.14.2) + Present Value of Asset Retirement Obligation (3.14.11) Capitalized Costs = 5. Depletion Base (3.14.14) Depletion Base = + Capitalized Costs (3.14.13) Residual Value Depletion Base = 3,000,000 0 = 3,000,000 6. Depletion Rate (3.14.15) Depletion Base (3.14.14) Depletion Rate = Estimated Recoverable Units 3,000,000 Depletion Rate = 1,000,000 = 3 7. Natural Resources Depletion (3.14.16) Depletion Amount = Depletion Rate (3.14.15) Depleted Units Debit Inventoryitem Depletion Amount Accumulated Depletionitem Depletion Amount = 3 200,000 = 600,000 Debit Credit 12/31/X1 Ore Inventory 600,000 Accumulated Depletion Mine 600,000 Ledger Ore Inventory 12/31/X1 500,000 12/31/X1 600,000 balance 1,100,000 XX/XX/XX Credit Depletion Amount

900,000 2,100,000 0 3,000,000

3.4

Natural Resources Restoration

Example 21: Natural Resources Restoration A rms natural resource exploitation site will require an expenditure of $5 million to reclaim the site so that it is environmentally acceptable. That expenditure is expected to be made ve years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will total depletion on the site increase, and how much accretion expense (in total) will be recognized, over the ve years (in millions)? Note: use 12/31/XX for all journal entries. Solution 21:

42

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES 1. Present Value of Asset Retirement Obligation (3.14.11) Present Value of Asset Retirement Obligation = pv[Asset Retirement Obligation (3.14.9), Discount Rate (3.14.10), Excavation Years] Present Value of Asset Retirement Obligation = 3,500,000 Since Purchased Property then: XX/XX/XX Debit Credit Propertyitem (3.1) (3.14.11) Asset Retirement Liability (3.14.7) (3.14.11) Debit Credit Exploration Site 3,500,000 Asset Retirement Liability 3,500,000

12/31/X1

2. Capitalized Costs (3.14.13) Capitalized Costs = + Acquisition Costs (3.14.1) + Exploration Costs (3.14.2) + Development Costs (3.14.5) + Present Value of Asset Retirement Obligation (3.14.11) Capitalized Costs = x + y + z + 3,500,000 3. Depletion Base (3.14.14) Depletion Base = + Capitalized Costs (3.14.13) Residual Value Depletion Base = x + y + z + 3,500,000 0 Depletion Base = 3,500,000 increase

x y z 3,500,000

4. Accretion Expense (3.14.12) Asset Retirement Obligation (3.14.9) PV of Asset Retirement Obligation (3.14.11) Accretion Expense Amount = Excavation Years 5,000,000 3,500,000 = 300,000 Accretion Expense Amount = 5 XX/XX/XX Accretion Expense Asset Retirement Liability (3.14.7) Debit Accretion Expense 300,000 Asset Retirement Liability Debit Accretion Expense 300,000 Asset Retirement Liability Debit Accretion Expense 300,000 Asset Retirement Liability Debit Accretion Expense 300,000 Asset Retirement Liability Debit Accretion Expense 300,000 Asset Retirement Liability Excretion Expense 12/31/X1 300,000 12/31/X2 300,000 12/31/X3 300,000 12/31/X4 300,000 12/31/X5 300,000 balance 1,500,000 Debit Accretion Expense Amount Credit 300,000 Credit 300,000 Credit 300,000 Credit 300,000 Credit 300,000 Credit Accretion Expense Amount

12/31/X1

12/31/X2

12/31/X3

12/31/X4

12/31/X5 Ledger

3.5. INTEREST CAPITALIZATION

43

3.5

Interest Capitalization

Example 22: Interest Capitalization A rm began construction of a building in 20X1; the construction qualies for interest capitalization. Two payments were made to the contractor during 20X1: April 1, $100,000; October 1, $100,000. Outstanding all year were (1) 5%, $60,000 construction loan, (2) 6% average rate on debt unrelated to the construction, total principal $400,000. What is the ending balance in Building Under Construction if the specic method is used to capitalize interest. Solution 22: 1. Make April 1 Payment Building Under Construction Cash Make October 1 Payment 10/1/X1 Ledger Building Under Construction 4/1/X1 100,000 10/1/X1 100,000 balance 200,000 2. Weighted Average Accumulated Expenditure, If Discrete Payments (3.6.4) Let n = the number of expenditures for the construction project during the year. Weighted-Average Accumulated Expenditure = Asset Under Constructionitem Beginning Balance + n i=1 [Expenditure Amounti Capitalization Period for Expenditurei (3.6.3)] Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) Expenditure Date Number of Project Months In Year 1/1/XX Asset Under Constructionitem WAAE0 Number of Project Months In Year Months Remaining After Expenditure1 Amount1 WAAE1 Date1 Number of Project Months In Year ... ... ... ... Months Remaining After Expendituren Daten Amountn WAAEn Number of Project Months In Year WAAE (3.6.4) Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) 1/1/X1 0 12 12 0 4/1/X1 100,000 9 12 75,000 10/1/X1 100,000 3 12 25,000 (3.6.4) 100,000 3. Excess Accumulated Principal (3.8.1) Excess Accumulated Principal = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Principal Excess Accumulated Principal = 100,000 60,000 = 40,000 4. Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal <= 0 then: Specic Construction Avoidable Interest = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Rate Fraction of the Year If Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Since Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = 60,000 0.05 12 12 = 3,000 Building Under Construction Cash 4/1/X1 Debit 100,000 Credit 100,000 Debit 100,000 Credit 100,000

44

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES 5. Specic Construction Interest Expense (3.8.3) Specic Construction Interest Expense = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Specic Construction Interest Expense = 60,000 0.05 12 12 = 3,000 6. Sum Other Debt Annual Interest (3.8.4) n Sum Other Debt Annual Interest = i=1 Annual Interest For Other Debt Principali Sum Other Debt Annual Interest = 400,000 0.06 = 24,000 7. Sum Other Debt Principal (3.8.5) n Sum Other Debt Principal = i=1 Other Debt Principali Sum Other Debt Principal = 400,000 8. Other Debt Weighted Average Interest Rate (3.8.6) Sum Other Debt Annual Interest (3.8.4) Other Debt Weighted Average Interest Rate = Sum Other Debt Principal (3.8.5) 24,000 Other Debt Weighted Average Interest Rate = 400,000 = 0.06 9. Separated Avoidable Interest (3.8.7) If Excess Accumulated Principal (3.8.1) <= 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) + [Excess Accumulated Principal (3.8.1) Other Debt Weighted-Average Interest Rate (3.8.6) Fraction of the Year] Since Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = 3,000 + [40,000 0.06 12 12 ] = 5,400

10. Avoidable Interest (3.9.1) Avoidable Interest = Comingled Avoidable Interest (3.7.4) or Separated Avoidable Interest (3.8.7) Avoidable Interest = 5,400 11. Actual Interest (3.9.2) Actual Interest = Sum Comingled Actual Interest (3.7.1) or [Sum Other Debt Annual Interest (3.8.4) Fraction of the Year] + Specic Construction Interest Expense (3.8.3) Actual Interest = [24,000 12 12 ] + 3,000 = 27,000 12. Interest Capitalization (3.9.3) If Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = Avoidable Interest (3.9.1) If Avoidable Interest (3.9.1) Actual Interest (3.9.2) then: Interest Capitalization = Actual Interest (3.9.2) Since Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = 5,400 13. Interest Capitalization Journal Entry (3.9.4) Debit Credit 12/31/XX Asset Under Constructionitem (3.9.3) Interest Expense (3.9.3) Debit Credit 12/31/X1 Building Under Construction 5,400 Interest Expense 5,400 Ledger Building Under Construction 4/1/X1 100,000 10/1/X1 100,000 12/31/X1 5,400 balance 205,400

3.6. INTEREST CAPITALIZATION

45

3.6

Interest Capitalization

Example 23: Interest Capitalization On January 1, 20X6, the Mills Conveying Equipment Company began construction of a building to be used as its oce headquarters. The building was completed on June 30, 20X7. Expenditures on the project for 20X6, mainly payments to subcontractors, were as follows: January 3, 20X6 $500,000 March 31, 20X6 400,000 September 30, 20X6 600,000 The rms debt is as follows: Construction Loan $1,000,000 Note 2,000,000 Note 4,000,000 8% 6% 12%

Provide the 12/31/X6 journal entry for interest capitalization, assuming separated debt. Solution 23: 1. Weighted Average Accumulated Expenditure, If Discrete Payments (3.6.4) Let n = the number of expenditures for the construction project during the year. Weighted-Average Accumulated Expenditure = Asset Under Constructionitem Beginning Balance + n i=1 [Expenditure Amounti Capitalization Period for Expenditurei (3.6.3)] Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) Expenditure Date Number of Project Months In Year 1/1/XX Asset Under Constructionitem WAAE0 Number of Project Months In Year Months Remaining After Expenditure1 Amount1 WAAE1 Date1 Number of Project Months In Year ... ... ... ... Months Remaining After Expendituren Daten Amountn WAAEn Number of Project Months In Year WAAE (3.6.4) Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) 1/1/X6 0 12 12 0 1/3/X6 500,000 12 12 500,000 3/31/X6 400,000 9 12 300,000 600,000 3 12 150,000 9/30/X6 (3.6.4) 950,000 2. Excess Accumulated Principal (3.8.1) Excess Accumulated Principal = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Principal Excess Accumulated Principal = 950,000 1,000,000 = -50,000 3. Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal <= 0 then: Specic Construction Avoidable Interest = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Rate Fraction of the Year If Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Since Excess Accumulated Principal <= 0 then: Specic Construction Avoidable Interest = 950,000 0.08 12 12 = 76,000 4. Specic Construction Interest Expense (3.8.3) Specic Construction Interest Expense = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Specic Construction Interest Expense = 1,000,000 0.08 12 12 = 80,000

46

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES 5. Sum Other Debt Annual Interest (3.8.4) n Sum Other Debt Annual Interest = i=1 Annual Interest For Other Debt Principali Sum Other Debt Annual Interest = (2,000,000 0.06) + (4,000,000 0.12) = 600,000 6. Sum Other Debt Principal (3.8.5) n Sum Other Debt Principal = i=1 Other Debt Principali Sum Other Debt Principal = 2,000,000 + 4,000,000 = 6,000,000 7. Other Debt Weighted Average Interest Rate (3.8.6) Sum Other Debt Annual Interest (3.8.4) Other Debt Weighted Average Interest Rate = Sum Other Debt Principal (3.8.5) 600,000 Other Debt Weighted Average Interest Rate = 6,000,000 = 0.10 8. Separated Avoidable Interest (3.8.7) If Excess Accumulated Principal (3.8.1) <= 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) + [Excess Accumulated Principal (3.8.1) Other Debt Weighted-Average Interest Rate (3.8.6) Fraction of the Year] Since Excess Accumulated Principal (3.8.1) <= 0 then: Separated Avoidable Interest = 76,000 9. Avoidable Interest (3.9.1) Avoidable Interest = Comingled Avoidable Interest (3.7.4) or Separated Avoidable Interest (3.8.7) Avoidable Interest = 76,000

10. Actual Interest (3.9.2) Actual Interest = Sum Comingled Actual Interest (3.7.1) or [Sum Other Debt Annual Interest (3.8.4) Fraction of the Year] + Specic Construction Interest Expense (3.8.3) 12 ] + 80,000 = 680,000 Actual Interest = [600,000 12 11. Interest Capitalization (3.9.3) If Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = Avoidable Interest (3.9.1) If Avoidable Interest (3.9.1) Actual Interest (3.9.2) then: Interest Capitalization = Actual Interest (3.9.2) Since Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = 76,000 12. Interest Capitalization Journal Entry (3.9.4) Debit 12/31/XX Asset Under Constructionitem (3.9.3) Interest Expense 12/31/X6 Credit

(3.9.3) Debit Headquarters Building Under Construction 76,000 Interest Expense

Credit 76,000

3.7

Interest Capitalization

Example 24: On January 1, 20X6, the Mills Conveying Equipment Company began construction of a building to be used as its oce headquarters. The building was completed on June 30, 20X7. Expenditures on the project for 20X6, mainly payments to subcontractors, were as follows: January 3, 20X6 $500,000 March 31, 20X6 400,000 September 30, 20X6 600,000

3.7. INTEREST CAPITALIZATION The rms debt is as follows: Construction Loan $500,000 Note 2,000,000 Note 4,000,000

47

8% 6% 12%

Provide the 12/31/X6 journal entry for interest capitalization, assuming separated debt. Solution 24: 1. Weighted Average Accumulated Expenditure, If Discrete Payments (3.6.4) Let n = the number of expenditures for the construction project during the year. Weighted-Average Accumulated Expenditure = Asset Under Constructionitem Beginning Balance + n i=1 [Expenditure Amounti Capitalization Period for Expenditurei (3.6.3)] Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) Number of Project Months In Year 1/1/XX Asset Under Constructionitem WAAE0 Number of Project Months In Year Months Remaining After Expenditure1 Date1 Amount1 WAAE1 Number of Project Months In Year ... ... ... ... Months Remaining After Expendituren Daten Amountn WAAEn Number of Project Months In Year WAAE (3.6.4) Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) 1/1/X6 0 12 12 0 1/3/X6 500,000 12 12 500,000 3/31/X6 400,000 9 12 300,000 9/30/X6 600,000 3 12 150,000 (3.6.4) 950,000 2. Excess Accumulated Principal (3.8.1) Excess Accumulated Principal = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Principal Excess Accumulated Principal = 950,000 500,000 = 450,000 3. Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal <= 0 then: Specic Construction Avoidable Interest = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Rate Fraction of the Year If Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Since Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = 500,000 0.08 12 12 = 40,000 4. Specic Construction Interest Expense (3.8.3) Specic Construction Interest Expense = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Specic Construction Interest Expense = 500,000 0.08 12 12 = 40,000 5. Sum Other Debt Annual Interest (3.8.4) n Sum Other Debt Annual Interest = i=1 Annual Interest For Other Debt Principali Sum Other Debt Annual Interest = (2,000,000 0.06) + (4,000,000 0.12) = 600,000 6. Sum Other Debt Principal (3.8.5) n Sum Other Debt Principal = i=1 Other Debt Principali Sum Other Debt Principal = 2,000,000 + 4,000,000 = 6,000,000 7. Other Debt Weighted Average Interest Rate (3.8.6) Sum Other Debt Annual Interest (3.8.4) Other Debt Weighted Average Interest Rate = Sum Other Debt Principal (3.8.5)

48

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES 600,000 Other Debt Weighted Average Interest Rate = 6,000,000 = 0.10 8. Separated Avoidable Interest (3.8.7) If Excess Accumulated Principal (3.8.1) <= 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) + [Excess Accumulated Principal (3.8.1) Other Debt Weighted-Average Interest Rate (3.8.6) Fraction of the Year] Since Excess Accumulated Principal (3.8.1) > 0 then: 12 ] = 85,000 Separated Avoidable Interest = 40,000 + [450,000 0.10 12 9. Avoidable Interest (3.9.1) Avoidable Interest = Comingled Avoidable Interest (3.7.4) or Separated Avoidable Interest (3.8.7) Avoidable Interest = 85,000

10. Actual Interest (3.9.2) Actual Interest = Sum Comingled Actual Interest (3.7.1) or [Sum Other Debt Annual Interest (3.8.4) Fraction of the Year] + Specic Construction Interest Expense (3.8.3) Actual Interest = [600,000 12 12 ] + 40,000 = 640,000 11. Interest Capitalization (3.9.3) If Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = Avoidable Interest (3.9.1) If Avoidable Interest (3.9.1) Actual Interest (3.9.2) then: Interest Capitalization = Actual Interest (3.9.2) Since Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = 85,000 12. Interest Capitalization Journal Entry (3.9.4) Debit 12/31/XX Asset Under Constructionitem (3.9.3) Interest Expense 12/31/X6

Credit

(3.9.3) Debit Headquarters Building Under Construction 85,000 Interest Expense

Credit 85,000

3.8

Interest Capitalization

Example 25: On January 1, 20X6, the Mills Conveying Equipment Company began construction of a building to be used as its oce headquarters. The building was completed on June 30, 20X7. The Headquarters Building Under Construction account has a balance of $1,576,000. Expenditures on the project for 20X7, mainly payments to subcontractors, were as follows: January 31, 20X7 $600,000 April 30, 20X7 300,000 The rms debt is as follows: Construction Loan $1,000,000 Note 2,000,000 Note 4,000,000 8% 6% 12%

Provide the 6/30/X7 journal entry for interest capitalization, assuming separated debt. Solution 25: 1. Weighted Average Accumulated Expenditure, If Discrete Payments (3.6.4) Let n = the number of expenditures for the construction project during the year.

3.8. INTEREST CAPITALIZATION

49

Weighted-Average Accumulated Expenditure = Asset Under Constructionitem Beginning Balance + n i=1 [Expenditure Amounti Capitalization Period for Expenditurei (3.6.3)] Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) Number of Project Months In Year 1/1/XX Asset Under Constructionitem WAAE0 Number of Project Months In Year Months Remaining After Expenditure1 Date1 Amount1 WAAE1 Number of Project Months In Year ... ... ... ... Months Remaining After Expendituren Daten Amountn WAAEn Number of Project Months In Year WAAE (3.6.4) Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) 1/1/X7 1,576,000 66 1,576,000 1/31/X7 600,000 56 500,000 300,000 26 100,000 4/30/X7 (3.6.4) 2,176,000 2. Excess Accumulated Principal (3.8.1) Excess Accumulated Principal = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Principal Excess Accumulated Principal = 2,176,000 1,000,000 = 1,176,000 3. Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal <= 0 then: Specic Construction Avoidable Interest = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Rate Fraction of the Year If Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Since Excess Accumulated Principal > 0 then: 6 = 40,000 Specic Construction Avoidable Interest = 1,000,000 0.08 12 4. Specic Construction Interest Expense (3.8.3) Specic Construction Interest Expense = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year 6 Specic Construction Interest Expense = 1,000,000 0.08 12 = 40,000 5. Sum Other Debt Annual Interest (3.8.4) n Sum Other Debt Annual Interest = i=1 Annual Interest For Other Debt Principali Sum Other Debt Annual Interest = (2,000,000 0.06) + (4,000,000 0.12) = 600,000 6. Sum Other Debt Principal (3.8.5) n Sum Other Debt Principal = i=1 Other Debt Principali Sum Other Debt Principal = 2,000,000 + 4,000,000 = 6,000,000 7. Other Debt Weighted Average Interest Rate (3.8.6) Sum Other Debt Annual Interest (3.8.4) Other Debt Weighted Average Interest Rate = Sum Other Debt Principal (3.8.5) 600,000 Other Debt Weighted Average Interest Rate = 6,000,000 = 0.10 8. Separated Avoidable Interest (3.8.7) If Excess Accumulated Principal (3.8.1) <= 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) If Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) + [Excess Accumulated Principal (3.8.1) Other Debt Weighted-Average Interest Rate (3.8.6) Fraction of the Year]

50

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES Since Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = 40,000 + [1,176,000 0.10 9. Avoidable Interest (3.9.1) Avoidable Interest = Comingled Avoidable Interest (3.7.4) or Separated Avoidable Interest (3.8.7) Avoidable Interest = 98,800

6 12 ]

= 98,800

10. Actual Interest (3.9.2) Actual Interest = Sum Comingled Actual Interest (3.7.1) or [Sum Other Debt Annual Interest (3.8.4) Fraction of the Year] + Specic Construction Interest Expense (3.8.3) 6 ] + 40,000 = 340,000 Actual Interest = [600,000 12 11. Interest Capitalization (3.9.3) If Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = Avoidable Interest (3.9.1) If Avoidable Interest (3.9.1) Actual Interest (3.9.2) then: Interest Capitalization = Actual Interest (3.9.2) Since Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = 98,800 12. Interest Capitalization Journal Entry (3.9.4) Debit 12/31/XX Asset Under Constructionitem (3.9.3) Interest Expense 6/30/X7 Credit

(3.9.3) Debit Headquarters Building Under Construction 98,800 Interest Expense

Credit 98,800

3.9

Interest Capitalization

Example 26: A rm is self-constructing a warehouse and has paid the subcontractor the following: 1/1 $210,000, 3/1 $300,000, 5/1 $540,000, and 12/31 $450,000. To help nance this project, a three year note was issued for $750,000 with an interest rate of 15%. Moreover, the rm has the following outstanding debt: a ve year note issue for $550,000 at 10% and a 10 year bond issue for $600,000 at 12%. The rm separates the construction loan from the other debt. What is the capitalized interest for the year? Also, provide the journal entry. Solution 26: 1. Weighted Average Accumulated Expenditure, If Discrete Payments (3.6.4) Let n = the number of expenditures for the construction project during the year. Weighted-Average Accumulated Expenditure = Asset Under Constructionitem Beginning Balance + n i=1 [Expenditure Amounti Capitalization Period for Expenditurei (3.6.3)] Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) Number of Project Months In Year 1/1/XX Asset Under Constructionitem WAAE0 Number of Project Months In Year Months Remaining After Expenditure1 Date1 Amount1 WAAE1 Number of Project Months In Year ... ... ... ... Months Remaining After Expendituren Daten Amountn WAAEn Number of Project Months In Year WAAE (3.6.4) Expenditure Date Expenditure Amount (1) Capitalization Period (2) WAAE (1) (2) 1/1 0 12 12 0 1/1 210,000 12 12 210,000 3/1 300,000 10 12 250,000 5/1 540,000 8 12 360,000 12/31 450,000 0 12 0 (3.6.4) 820,000

3.9. INTEREST CAPITALIZATION 2. Excess Accumulated Principal (3.8.1) Excess Accumulated Principal = Weighted-Average Accumulated Expenditure (3.6.4) or (3.6.6) Specic Construction Debt Principal Excess Accumulated Principal = 820,000 750,000 = 70,000 3. Specic Construction Avoidable Interest (3.8.2) Since Excess Accumulated Principal > 0 then: Specic Construction Avoidable Interest = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Specic Construction Avoidable Interest = 750,000 0.15 12 12 = 112,500 4. Specic Construction Interest Expense (3.8.3) Specic Construction Interest Expense = Specic Construction Debt Principal Specic Construction Debt Rate Fraction of the Year Specic Construction Interest Expense = 750,000 0.15 12 12 = 112,500 5. Sum Other Debt Annual Interest (3.8.4) n Sum Other Debt Annual Interest = i=1 Annual Interest For Other Debt Principali Sum Other Debt Annual Interest = (550,000 0.10) + (600,000 0.12) = 127,000 6. Sum Other Debt Principal (3.8.5) n Sum Other Debt Principal = i=1 Other Debt Principali Sum Other Debt Principal = 550,000 + 600,000 = 1,150,000 7. Other Debt Weighted Average Interest Rate (3.8.6) Sum Other Debt Annual Interest (3.8.4) Other Debt Weighted Average Interest Rate = Sum Other Debt Principal (3.8.5) 127,000 Other Debt Weighted Average Interest Rate = 1,150,000 = 0.1104 8. Separated Avoidable Interest (3.8.7) Since Excess Accumulated Principal (3.8.1) > 0 then: Separated Avoidable Interest = Specic Construction Avoidable Interest (3.8.2) + [Excess Accumulated Principal (3.8.1) Other Debt Weighted-Average Interest Rate (3.8.6) Fraction of the Year] Separated Avoidable Interest = 112,500 + [70,000 0.1104 12 12 ] = 120,228 9. Avoidable Interest (3.9.1) Avoidable Interest = Comingled Avoidable Interest (3.7.4) or Separated Avoidable Interest (3.8.7) Avoidable Interest = 120,228 10. Actual Interest (3.9.2) Actual Interest = Sum Comingled Actual Interest (3.7.1) or [Sum Other Debt Annual Interest (3.8.4) Fraction of the Year] + Specic Construction Interest Expense (3.8.3) Actual Interest = [127,000 12 12 ] + 112,500 = 239,500 11. Interest Capitalization (3.9.3) If Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = Avoidable Interest (3.9.1) If Avoidable Interest (3.9.1) Actual Interest (3.9.2) then: Interest Capitalization = Actual Interest (3.9.2) Since Avoidable Interest (3.9.1) < Actual Interest (3.9.2) then: Interest Capitalization = 120,228 12. 12/31/XX Asset Under Construction Interest Expense Debit (3.9.3) Credit (3.9.3)

51

52

CHAPTER 3. PROPERTY PLANT AND EQUIPMENT EXAMPLES Debit 120,228 Credit 120,228

12/31/XX

Warehouse Under Construction Interest Expense

Chapter 4

Liabilities Examples
4.1 Payroll Journal Entry: Simple

Example 27: Payroll Employee Gross Pay = $30,000. FICA = 7% and applies only to $20,000 of gross pay. Employee Health Insurance Total Premium = $4,000. Employee Health Insurance Percent Paid By Employer = 75%. Federal Income Tax Withholding Amount = $6,000. Record the 1/7/X1 Payroll Journal Entry: Salary/Wage Cash Payment. Record the 1/7/X1 Payroll Journal Entry: Payroll Tax Expense. Solution 27:

1. Social Security Employer Tax Amount (4.1.28) Social Security Employer Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount Social Security Employer Tax Rate (4.1.27) Social Security Employer Tax Amount = 20,000 0.07 = 1,400 2. Social Security Employee Tax Amount (4.1.11) Social Security Employee Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount Social Security Employee Tax Rate (4.1.10) Social Security Employee Tax Amount = 20,000 0.07 = 1,400 3. Health Insurance Employee Benet Amount (4.1.18) Health Insurance Employee Benet Amount = Health Insurance Premium Amount (1 Percent Paid By Employee) Percent Paid By Employee = (1 Percent Paid By Employer) = 1 0.75 = 0.25 Health Insurance Employee Benet Amount = 4,000 (1 0.25) = 3,000 4. Health Insurance Employee Cost Amount (4.1.19) Health Insurance Employee Cost Amount = Health Insurance Premium Amount Percent Paid By Employee Percent Paid By Employee = (1 Percent Paid By Employer) = 1 0.75 = 0.25 Health Insurance Employee Cost Amount = 4,000 0.25 = 1,000 5. Gross Benet (4.1.23) Gross Benet = Employee Gross Pay (4.1.1) + Health Insurance Employee Benet Amount (4.1.18) + Retirement Plan Employee Benet Amount (4.1.21) Gross Benet = 30,000 + 3,000 + 0 = 33,000 6. Employee Net Pay (4.1.25) 53

54 Employee Net Pay = + Employee Net Pay =

CHAPTER 4. LIABILITIES EXAMPLES Employee Gross Pay (4.1.1) Federal Income Tax Withholding Amount (4.1.3) State Income Tax Withholding Amount (4.1.5) Social Security Employee Tax Amount (4.1.11) Medicare Employee Tax Amount (4.1.15) Union Dues Withholding (4.1.16) Health Insurance Employee Cost Amount (4.1.19) Retirement Employee Cost Amount (4.1.22) 30,000 6,000 0 1,400 0 0 1,000 0 21,600 Credit (4.1.3) (4.1.5) (4.1.11) (4.1.15) (4.1.16) Health Premium Amount Retirement Benet Amount Employee Net Pay (4.1.25)

7. Payroll Journal Entry: Salary/Wage Cash Payment (4.1.26) XX/XX/XX Debit Salary/Wage Expense (4.1.24) Benet (4.1.23) Federal Income Tax Withholding Payable State Income Tax Withholding Payable Social Security Tax Payable Medicare Tax Payable Union Dues Payable Health Insurance Payable Retirement Plan Payable Cash Debit Credit Salary/Wage Expense 33,000 Federal Income Tax Withholding Payable 6,000 Social Security Tax Payable 1,400 Health Insurance Payable 4,000 Cash 21,600

1/7/X1

8. Payroll Tax Expense Amount (4.1.38) Payroll Tax Expense Amount = + Social Security Employer Tax Amount (4.1.28) + Medicare Employer Tax Amount (4.1.30) + Federal Unemployment Tax Amount (4.1.33) + State Unemployment Tax Amount (4.1.36) Payroll Tax Expense Amount = 9. Payroll Journal Entry: Payroll Tax Expense (4.1.39) XX/XX/XX

1,400 0 0 0 1,400 Credit (4.1.28) (4.1.30) (4.1.33) (4.1.36)

1/7/X1

Debit Payroll Tax Expense (4.1.37) Payroll Tax Expense Amount (4.1.38) Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Debit Credit Payroll Tax Expense 1,400 Social Security Tax Payable 1,400

4.2

Payroll Journal Entry: Complex

Example 28: Payroll Employee Gross Pay = $60,000. FICA = 7% and applies only to $40,000 of gross pay. Federal Income Tax Withholding Amount = $18,000. State income tax withholding = $2,000. State unemployment tax rate = 5% and applies only to $20,000 of gross pay. Federal unemployment tax rate = 1% and applies only to $20,000 of gross pay. Union dues withheld = $1,000. Employee Health Insurance Total Premium = $3,000. Employee Health Insurance Percent Paid By Employee = 1 3. Employee Retirement Plan Total Premium = $4,000. Employee Retirement Plan Percent Paid By Employee = 25%.

4.2. PAYROLL JOURNAL ENTRY: COMPLEX

55

Record the 1/7/X2 Payroll Journal Entry: Salary/Wage Cash Payment. Record the 1/7/X2 Payroll Journal Entry: Payroll Tax Expense. Solution 28:

1. Social Security Employer Tax Amount (4.1.28) Social Security Employer Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount Social Security Employer Tax Rate (4.1.27) Social Security Employer Tax Amount = 40,000 0.07 = 2,800 2. Social Security Employee Tax Amount (4.1.11) Social Security Employee Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount Social Security Employee Tax Rate (4.1.10) Social Security Employee Tax Amount = 40,000 0.07 = 2,800 3. Health Insurance Employee Benet Amount (4.1.18) Health Insurance Employee Benet Amount = Health Insurance Premium Amount (1 Percent Paid By Employee) Health Insurance Employee Benet Amount = 3,000 (1 1 3 ) = 2,000 4. Health Insurance Employee Cost Amount (4.1.19) Health Insurance Employee Cost Amount = Health Insurance Premium Amount Percent Paid By Employee Health Insurance Employee Cost Amount = 3,000 1 3 = 1,000 5. Retirement Employee Benet Amount (4.1.21) Retirement Employee Benet Amount = Retirement Benet Amount (1 Percent Paid By Employee) Retirement Employee Benet Amount = 4,000 (1 0.25) = 3,000 6. Retirement Employee Cost Amount (4.1.22) Retirement Employee Cost Amount = Retirement Benet Amount Percent Paid By Employee Retirement Employee Cost Amount = 4,000 0.25 = 1,000 7. Gross Benet (4.1.23) Gross Benet = Employee Gross Pay (4.1.1) + Health Insurance Employee Benet Amount (4.1.18) + Retirement Plan Employee Benet Amount (4.1.21) Gross Benet = 60,000 + 2,000 + 3,000 = 65,000 8. Employee Net Pay (4.1.25) Employee Net Pay = + Employee Gross Pay (4.1.1) Federal Income Tax Withholding Amount (4.1.3) State Income Tax Withholding Amount (4.1.5) Social Security Employee Tax Amount (4.1.11) Medicare Employee Tax Amount (4.1.15) Union Dues Withholding (4.1.16) Health Insurance Employee Cost Amount (4.1.19) Retirement Employee Cost Amount (4.1.22) Employee Net Pay = 9. Payroll Journal Entry: Salary/Wage Cash Payment (4.1.26)

60,000 18,000 2,000 2,800 0 1,000 1,000 1,000 34,200

56

CHAPTER 4. LIABILITIES EXAMPLES Debit Salary/Wage Expense (4.1.24) Benet (4.1.23) Federal Income Tax Withholding Payable State Income Tax Withholding Payable Social Security Tax Payable Medicare Tax Payable Union Dues Payable Health Insurance Payable Retirement Plan Payable Cash Debit Credit Salary/Wage Expense 65,000 Federal Income Tax Withholding Payable 18,000 State Income Tax Withholding Payable 2,000 Social Security Tax Payable 2,800 Health Insurance Payable 3,000 Retirement Plan Payable 4,000 Union Dues Payable 1,000 Cash 34,200 Credit (4.1.3) (4.1.5) (4.1.11) (4.1.15) (4.1.16) Health Premium Amount Retirement Benet Amount Employee Net Pay (4.1.25)

XX/XX/XX

1/7/X2

10. Federal Unemployment Tax Amount (4.1.33) Federal Unemployment Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount Federal Unemployment Tax Rate (4.1.32) Federal Unemployment Tax Amount = 20,000 0.01 = 200 11. State Unemployment Tax Amount (4.1.36) State Unemployment Tax Amount = Employee Gross Pay (4.1.1) or Qualifying Amount State Unemployment Tax Rate (4.1.35) State Unemployment Tax Amount = 20,000 0.05 = 1,000 12. Payroll Tax Expense Amount (4.1.38) Payroll Tax Expense Amount = + Social Security Employer Tax Amount (4.1.28) + Medicare Employer Tax Amount (4.1.30) + Federal Unemployment Tax Amount (4.1.33) + State Unemployment Tax Amount (4.1.36) Payroll Tax Expense Amount = 13. Payroll Journal Entry: Payroll Tax Expense (4.1.39) XX/XX/XX Debit Payroll Tax Expense (4.1.37) Payroll Tax Expense Amount (4.1.38) Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Debit Credit Payroll Tax Expense 4,000 Social Security Tax Payable 2,800 Federal Unemployment Tax Payable 200 State Unemployment Tax Payable 1,000 Credit (4.1.28) (4.1.30) (4.1.33) (4.1.36)

2,800 0 200 1,000 4,000

1/7/X2

4.3

Compensated Absenses

Example 29: Compensated Absenses Davidson-Getty Chemicals has 8,000 employees. Each employee earns two weeks of paid vacation per year. Vacation time not taken in the year is carried over to subsequent years. During 20X6, 2,500 employees took both weeks vacation, but at year-end, 5,500 employees had vacation time carryovers as follows:

4.3. COMPENSATED ABSENSES Employee Count (1) 2,500 2,000 3,500 8,000 Vacation Weeks Earned but Not Taken (2) 0 1 2 Carryover Weeks (1) (2) 0 2,000 7,000 9,000

57

Additional information follows: Average weekly 20X6 salary = $600. Employees taking both weeks of vacation in 20X6 earned in 20X6 = 2,500. Employees taking only one week of vacation in 20X6 earned in 20X6 = 1,000. Record the 20X6 Take Vacation Earned Current Year Journal Entry. Record the 20X6 Accrue Vacation Adjusting Entry. Weeks of vacation taken in 20X7 that were earned in 20X6 = 9,000. Ination rate for 20X6 20X7 = 5.556%. Record the 20X7 Take Vacation Earned Prior Year Journal Entry. Solution 29: 1. Take Vacation Earned Current Year Journal Entry (4.2.1) Actual Amount = [(2,000 1) + (2,500 2)] 600 = 4,200,000 Debit Credit XX/XX/XX Salary/Wage Expense Actual Amount Cash or Salary/Wage Payable Actual Amount Debit Credit 20X6 Salary/Wage Expense 4,200,000 Cash or Salary/Wage Payable 4,200,000 2. Total Carryover Weeks (4.2.4) n Total Carryover Weeks = i=0 Vacation Weeks Earned But Not Taken (4.2.3)i Employee Count of Those Who Accrued Vacation (4.2.2)i = 9,000 3. Liability Amount (4.2.6) Liability Amount = [Total Carryover Weeks (4.2.4) Average Weekly Pay] Estimate of Benets Not Expected to be Taken Liability Amount = [9,000 600] 0 = 5,400,000 4. Accrue Vacation Adjusting Entry (4.2.7) 12/31/XX Salary/Wage Expense Vacation Payable Salary/Wage Expense Vacation Payable Debit Liability Amount (4.2.6) Debit 5,400,000 Credit 5,400,000 Credit Liability Amount (4.2.6)

12/31/X6

5. Take Vacation Earned Prior Year: Salary/Wage Payable Amount (4.2.8) Salary/Wage Payable Amount = Weeks Taken Average Weekly Pay (1 + Ination Rate) OR Salary/Wage Payable Amount = Actual Amount Salary/Wage Payable Amount = 9,000 600 (1 + 0.05556) = 5,700,000 6. Take Vacation Earned Prior Year: Vacation Payable Amount (4.2.9) Vacation Payable Amount = Weeks Taken Average Weekly Pay Vacation Payable Amount = 9,000 600 = 5,400,000

58

CHAPTER 4. LIABILITIES EXAMPLES 7. Take Vacation Earned Prior Year: Salary Expense Amount (4.2.10) Salary Expense Amount = Salary/Wage Payable Amount (4.2.8) Vacation Payable Amount (4.2.9) Salary Expense Amount = 5,700,000 5,400,000 = 300,000 8. Take Vacation Earned Prior Year Journal Entry (4.2.11) Debit Credit XX/XX/XX Vacation Payable (4.2.9) Salary Expense (4.2.10) Salary/Wage Payable (4.2.8) Debit Credit 20X7 Vacation Payable 5,400,000 Salary Expense 300,000 Salary/Wage Payable 5,700,000

4.4

Warranty Claims: Expected Cash Flow Approach

Example 30: Warranty Claims: Expected Cash Flow Approach End of year date = 12/31/20X6. Risk Free Interest Rate = 5%. Expected Cash Outow Table Warranty Year Cost Probability 20X7 $50,000 20% 20X7 $60,000 50% 20X7 $70,000 30% 20X8 $70,000 20% 20X8 $80,000 50% 20X8 $90,000 30% Record the Warranty Claims Adjusting Journal Entry. Solution 30: 1. Estimated Warranty Claims: Expected Cash Outow Method Table (4.3.4) pv( 1, 0.05 ) = 0.95238 pv( 2, 0.05 ) = 0.90703 Year 20X7 20X7 20X7 20X8 20X8 20X8 Warranty Cost $50,000 60,000 70,000 70,000 80,000 90,000 Probability 20% 50% 30% 20% 50% 30% Cost Probability (1) $10,000 30,000 21,000 14,000 40,000 27,000 (1) = Weighted Average (2)
n x=1

PV of y at Risk Free Rate (3)

PV of Weighted Average (2) (3)

$61,000

0.95238

$58,095

$81,000

0.90703

73,469 131,564

2. Estimated Warranty Claims: Expected Cash Flow Method (4.3.3) Let x = a future Cost Probability likelihood. Let n = the number of Cost Probability likelihoods for year y. Let y = a future year. Let p = the number of years of the warranty period. Estimated Warranty Claims = p n y =1 { x=1 [Expected Warranty Costx Probability of Costx ] pv(y, Risk Free Rate)} = $131,564 3. Warranty Claims Adjustment Amount (4.3.5) Warrancy Claims Adjustment Amount = Estimated Warranty Claims (4.3.2) or (4.3.3) Warranty Expense Debit Balance Warrancy Claims Adjustment Amount = 131,564 0 = 131,564

4.5. BOND ISSUE 4. Warranty Claims Adjusting Journal Entry (4.3.6) XX/XX/XX Warranty Expense Warranty Liability Warranty Expense Warranty Liability Debit Adjustment Amount (4.3.5) Credit 131,564 Credit Adjustment Amount (4.3.5)

59

12/31/X6

Debit 131,564

4.5

Bond Issue

Example 31: Bond Issue Face Amount = $400,000. Interest Payment Amount = $16,000. Bond Issue Price = $379,699. Bond Term = 3 years. What is the Coupon Interest Rate? What is the Total Interest Expense? What is the Book Value of the bond issue after the 4th payment? If 50 bonds were retired immediately after the 3rd payment at 102, what is the gain or loss recognized? Solution 31: 1. Interest Payment Amount (4.6.12) Interest Payment Amount = Face Amount (4.6.5) Coupon Interest Rate (4.6.10) 2 Coupon Interest Rate 16,000 = 400,000 2 16,000 Coupon Interest Rate = 400,000 2 = 0.08 2. Discount Amount (4.6.18) Since the bond issue is a Discount Bond (4.6.17) then: Discount Amount = Face Amount (4.6.5) Bond Issue Price (4.6.14) Discount Amount = 400,000 379,699 = 20,301 3. Total Interest Cash (4.6.24) Total Interest Cash = Interest Payment Amount (4.6.12) 2 Bond Term (4.6.9) Total Interest Cash = 16,000 2 3 = 96,000 4. Total Interest Expense (4.6.25) Since Discount Bond (4.6.17) then: Total Interest Expense = Total Interest Cash (4.6.24) + Discount Amount (4.6.18) Total Interest Expense = 96,000 + 20,301 = 116,301 5. Bond Issue Price (4.6.14) , Bond Term (4.6.9) 2] + Market Interest Rate (4.6.13) pva[Interest Payment Amount (4.6.12), , Bond Term (4.6.9) 2] 2 Market Interest Rate Market Interest Rate , 3 2] + pva[16,000, , 3 2] 379,699 = pv[400,000, 2 2 Market Interest Rate = 0.10 Bond Issue Price = pv[Face Amount (4.6.5),
2

Market Interest Rate (4.6.13)

6. Bond Issue Book Value (4.6.23) Bond Issue Book Value = Market Interest Rate (4.6.13) pv[Face Amount (4.6.5), , Remaining Interest Payments (4.6.16)] + 2 Market Interest Rate (4.6.13) pva[Interest Payment Amount (4.6.12), , Remaining Interest Payments (4.6.16)] 2 0.10 0.10 Bond Issue Book Value = pv[400,000, 2 , 2] + pva[16,000, 2 , 2] = 362,812 + 29,751 = 392,563

60 7. Percentage of Issue Reacquired (4.8.2) Quantity of Bonds Reacquired Percentage of Issue Reacquired = Face Amount (4.6.5) 1000 1 Percentage of Issue Reacquired = 50 400,000 = 8

CHAPTER 4. LIABILITIES EXAMPLES

1000

8. Reacquisition Face Amount (4.8.3) Reacquisition Face Amount = Face Amount (4.6.5) Percentage of Issue Reacquired (4.8.2) Reacquisition Face Amount = 400, 000 1 8 = 50,000 9. Reacquisition Price (4.8.9) Reacquisition Price = [Face Amount (4.6.5) Bond Quote Percentage (4.6.11) Percentage of Issue Reacquired (4.8.2)] Reacquisition Interest Accrual Amount (4.8.8) Reacquisition Fees Reacquisition Price = [400,000 1.02 1 8 ] + 0 + 0 = 51,000 + +

10. Bond Issue Book Value (4.6.23) Bond Issue Book Value = Market Interest Rate (4.6.13) pv[Face Amount (4.6.5), , Remaining Interest Payments (4.6.16)] + 2 Market Interest Rate (4.6.13) , Remaining Interest Payments (4.6.16)] pva[Interest Payment Amount (4.6.12), 2 0.10 .010 Bond Issue Book Value = pv[400,000, 2 , 3] + pva[16,000, 2 , 3] = 345,535 + 43,572 = 389,107 11. Reacquisition Discount Amount (4.8.10) Since the bond issue is a Discount Bond (4.6.17) then: Reacquisition Discount Amount = Face Amount (4.6.5) Bond Issue Book Value (4.6.23) Reacquisition Discount Amount = 400,000 389,107 = 10,893 12. Reacquisition Amortization Amount (4.8.12) Since Discount Bond (4.6.17) then: Reacquisition Amortization Amount = Discount on Bonds Payableissue (4.6.19) Debit Balance OR Reacquisition Discount Amount (4.8.10) Percentage of Issue Reacquired (4.8.2) 1 Reacquisition Amortization Amount = 10,893 8 = 1,362 13. Gain or (Loss) on Reacquisition (4.8.14) Since Discount Bond (4.6.17) then: Gain or (Loss) on Reacquisition = [Face Amount (4.6.5) Discount on Bonds Payableissue (4.6.19) Unamortized Bond Issue Costsissue (4.6.27)] Percentage of Issue Reacquired (4.8.2) Reacquisition Interest Accrual Amount (4.8.8) Reacquisition Fees Reacquisition Price (4.8.9) 1 0 51,000 = -2,362 Gain or (Loss) on Reacquisition = [400,000 10,893] 8

4.6

Installment Note: Simple

Example 32: Installment Note A rm purchased a truck by paying $5,000 in cash and signing a $10,000 installment note with the following characteristics: Note Amount = $10,000. Payments Per Year = 1. Note Interest Rate = 10%. Market Interest Rate = 10%. Note Term = 4 years. Purchase date = 1/1/X8.

4.7. INSTALLMENT NOTE: COMPLEX What is the purchase journal entry? What is the rst payment journal entry? Solution 32: 1. Market Period Interest Rate (4.5.4) Market Interest Rate (4.5.1) Market Period Interest Rate = Payments Per Year (4.5.3) Market Period Interest Rate = 0.10 1 = 0.10 2. Note Period Interest Rate (4.5.5) Note Interest Rate (4.5.2) Note Period Interest Rate = Payments Per Year (4.5.3) Note Period Interest Rate = 0.10 1 = 0.10 3. Period Payment Amount (4.5.6) Note Amount Period Payment Amount = pva[$1, Note Period Interest Rate (4.5.5), Note Term Payments Per Year (4.5.3) 10,000 Period Payment Amount = = 3,155 pva[$1, 0.10, 4 1

61

4. Present Value of Note (4.5.7) Present Value of Note = pva[Period Payment (4.5.6), Market Period Interest Rate (4.5.4), Note Term Payments Per Year (4.5.3)] Present Value of Note = pva[3,155, 0.10, 4 1] = 10,000 5. Borrow Money or Purchase With Note (4.5.8) XX/XX/XX Cash or PP&Eitem Notes Payableissue Truck Notes Payable Truck Cash Debit Present Value of Note (4.5.7) Debit 15,000 Credit 10,000 5,000 Credit Present Value of Note (4.5.7)

01/01/X8

6. Period Interest Expense Amount (4.5.9) Period Interest Expense Amount = Note Payableissue Credit Balance Market Period Interest Rate (4.5.4) Period Interest Expense Amount = 10,000 0.10 = 1,000 7. Period Note Amortization Amount (4.5.10) Period Note Amortization Amount = Period Payment Amount (4.5.6) Period Interest Expense Amount (4.5.9) Period Note Amortization Amount = 3,155 1,000 = 2,155 8. Make an Installment Note Payment (4.5.11) XX/XX/XX Interest Expense Note Payableissue Cash Interest Expense Note Payable Truck Cash Debit Period Interest Expense Amount (4.5.9) Period Note Amortization Amount (4.5.10) Debit 1,000 2,155 Credit Credit

Period Payment Amount (4.5.6)

03/31/X8

3,155

4.7

Installment Note: Complex

Example 33: Installment Note A rm purchased a truck by paying $5,000 in cash and signing a $10,000 installment note with the following characteristics: Note Amount = $10,000. Payments Per Year = 4.

62 Note Interest Rate = 4%. Market Interest Rate = 10%. Note Term = 4 years. Purchase date = 1/1/X8. What is the purchase journal entry? What is the rst payment journal entry? Solution 33:

CHAPTER 4. LIABILITIES EXAMPLES

1. Market Period Interest Rate (4.5.4) Market Interest Rate (4.5.1) Market Period Interest Rate = Payments Per Year (4.5.3) 0.10 Market Period Interest Rate = 4 = 0.025 2. Note Period Interest Rate (4.5.5) Note Interest Rate (4.5.2) Note Period Interest Rate = Payments Per Year (4.5.3) Note Period Interest Rate = 0.04 4 = 0.01 3. Period Payment Amount (4.5.6) Note Amount Period Payment Amount = pva[$1, Note Period Interest Rate (4.5.5), Note Term Payments Per Year (4.5.3) 10,000 Period Payment Amount = = 679 pva[$1, 0.01, 4 4 4. Present Value of Note (4.5.7) Present Value of Note = pva[Period Payment (4.5.6), Market Period Interest Rate (4.5.4), Note Term Payments Per Year (4.5.3)] Present Value of Note = pva[679, 0.025, 4 4] = 8,864 5. Borrow Money or Purchase With Note (4.5.8) XX/XX/XX Cash or PP&Eitem Notes Payableissue Truck Notes Payable Truck Cash Debit Present Value of Note (4.5.7) Debit 13,864 Credit 8,864 5,000 Credit Present Value of Note (4.5.7)

01/01/X8

6. Period Interest Expense Amount (4.5.9) Period Interest Expense Amount = Note Payableissue Credit Balance Market Period Interest Rate (4.5.4) Period Interest Expense Amount = 8,864 0.025 = 222 7. Period Note Amortization Amount (4.5.10) Period Note Amortization Amount = Period Payment Amount (4.5.6) Period Interest Expense Amount (4.5.9) Period Note Amortization Amount = 679 222 = 457 8. Make an Installment Note Payment (4.5.11) XX/XX/XX Interest Expense Note Payableissue Cash Interest Expense Note Payable Truck Cash Debit Period Interest Expense Amount (4.5.9) Period Note Amortization Amount (4.5.10) Debit 222 457 Credit Credit

Period Payment Amount (4.5.6)

03/31/X8

679

4.8. BOND EARLY REACQUISITION: SIMPLE

63

4.8

Bond Early Reacquisition: Simple

Example 34: Bond Early Reacquisition Face Amount per Bond = $1,000. Bond Quantity Issued = 1. Semiannual Interest Payments Remaining = 12. Coupon Interest Rate = 4%. Issuance Market Rate = 6%. Retirement Market Rate = 8%. Reacquisition Date = 6/30/X8. What is the reacquisition journal entry? Solution 34:

1. Discount Bond (4.6.17) A Discount Bond is a bond issue with the Coupon Interest Rate (4.6.10) less than the Market Interest Rate (4.6.13). 2. Face Amount (4.6.5) Face Amount = Face Amount per Bond (4.6.3) Bond Quantity Issued (4.6.4) Face Amount = 1,000 1 = 1,000 3. Reacquisition Face Amount (4.8.3) Reacquisition Face Amount = Face Amount (4.6.5) Percentage of Issue Reacquired (4.8.2) Reacquisition Face Amount = 1,000 1.00 = 1,000 4. Interest Payment Amount (4.6.12) Interest Payment Amount = Face Amount (4.6.5) Coupon Interest Rate (4.6.10) 2 Interest Payment Amount = 1,000 0.04 = 20 2 5. Bond Issue Book Value (4.6.23) Bond Issue Book Value = Market Interest Rate (4.6.13) pv[Face Amount (4.6.5), , Remaining Interest Payments (4.6.16)] + 2 Market Interest Rate (4.6.13) pva[Interest Payment Amount (4.6.12), , Remaining Interest Payments (4.6.16)] 2 0.06 0.04 Bond Issue Book Value = pv[1,000, 2 , 12] + pva[20, 2 , 12] = 900 6. Bond Issue Book Value (4.6.23) Since Discount Bond (4.6.17) then: Bond Issue Book Value = Bonds Payableissue (4.6.1) Discount on Bonds Payableissue (4.6.19) Discount on Bonds Payableissue (4.6.19) = Bonds Payableissue (4.6.1) Bond Issue Book Value Discount on Bonds Payableissue (4.6.19) = 1,000 900 = 100 7. Reacquisition Amortization Amount (4.8.12) Since Discount Bond (4.6.17) then: Reacquisition Amortization Amount = Discount on Bonds Payableissue (4.6.19) Debit Balance or Discount Amount (4.6.18) Percentage of Issue Reacquired (4.8.2) Reacquisition Amortization Amount = 100 1.00 = 100 8. Reacquistion Price (4.8.9)

64 Reacquisition Price =

CHAPTER 4. LIABILITIES EXAMPLES

, Remaining Payments] 2 Market Interest Rate (4.6.13) pva[Interest Payment Amount (4.6.12), , Remaining Payments]} 2 Percentage of Issue Reacquired (4.8.2) Reacquisition Interest Accrual Amount (4.8.8) Reacquisition Fees Reacquisition Price = 0.08 , 12]} 1.00 + 0 + 0 = 812 {pv[1,000, 0.08 2 , 12] + pva[20, 2 9. Gain or (Loss) on Reacquisition (4.8.14) Since Discount Bond (4.6.17) then: Gain or (Loss) on Reacquisition = [Face Amount (4.6.5) Discount on Bonds Payableissue (4.6.19) Unamortized Bond Issue Costsissue (4.6.27)] Percentage of Issue Reacquired (4.8.2) Reacquisition Interest Accrual Amount (4.8.8) Reacquisition Fees Reacquisition Price (4.8.9) Gain or (Loss) on Reacquisition = [1,000 100 0] 1.00 0 0 812 = 88 10. Reacquisition Journal Entry (4.8.15) Since Discount Bond (4.6.17) and Gain (4.8.14) then: XX/XX/XX Debit Bonds Payableissue (4.6.1) Face Amount (4.8.3) Discount on Bonds Payableissue Unamortized Bond Issue Costsissue Gain on Reacquisition Cash Debit Credit Bonds Payable 1,000 Discount on Bonds Payable 100 Gain on Reacquisition 88 Cash 812

{pv[Face Amount (4.6.5),

Market Interest Rate (4.6.13)

+ + +

Credit Amortization Amount (4.8.12) Unamortized Costs (4.8.13) Gain (4.8.14) Reacquisition Price (4.8.9)

06/30/X8

4.9

Bond Early Reacquistion: Complex

Example 35: Bond Early Reacquisition Face Amount per Bond = $1,000. Bond Quantity Issued = 700. Bond Date = 1/1/X7. Coupon Interest Rate = 12%. Issuance Market Rate = 14%. Reacquisition Book Value = 676,288. Reacquisition Price = 685,000. What is the reacquisition journal entry? Solution 35: 1. Face Amount (4.6.5) Face Amount = Face Amount per Bond (4.6.3) Bond Quantity Issued (4.6.4) Face Amount = 1,000 700 = 700,000 2. Discount Bond (4.6.17) A Discount Bond is a bond issue with the Coupon Interest Rate (4.6.10) less than the Market Interest Rate (4.6.13). 3. Bond Issue Book Value (4.6.23) Since Discount Bond (4.6.17) then: Bond Issue Book Value = Bonds Payableissue (4.6.1) Discount on Bonds Payableissue (4.6.19)

4.10. TROUBLED DEBT RESTRUCTURING Discount on Bonds Payableissue (4.6.19) = Bonds Payableissue (4.6.1) Bond Issue Book Value Discount on Bonds Payableissue (4.6.19) = 700,000 676,288 = 23,712 4. Gain or (Loss) on Reacquisition (4.8.14) Since Discount Bond (4.6.17) then: Gain or (Loss) on Reacquisition = [Face Amount (4.6.5) Discount on Bonds Payableissue (4.6.19) Unamortized Bond Issue Costsissue (4.6.27)] Percentage of Issue Reacquired (4.8.2) Reacquisition Interest Accrual Amount (4.8.8) Reacquisition Fees Reacquisition Price (4.8.9) Gain or (Loss) on Reacquisition = [700,000 23,712 0] 1.00 0 0 685,000 = -8,712 5. Reacquisition Face Amount (4.8.3) Reacquisition Face Amount = Face Amount (4.6.5) Percentage of Issue Reacquired (4.8.2) Reacquisition Face Amount = 700,000 1.00 = 700,000 6. Reacquisition Amortization Amount (4.8.12) Since Discount Bond (4.6.17) then: Reacquisition Amortization Amount = Discount on Bonds Payableissue (4.6.19) Debit Balance or Discount Amount (4.6.18) Percentage of Issue Reacquired (4.8.2) Reacquisition Amortization Amount = 23,712 1.00 = 23,712 7. Reacquisition Journal Entry (4.8.15) Since Discount Bond (4.6.17) and (Loss) (4.8.14) then: XX/XX/XX Bonds Payableissue (4.6.1) Loss on Reacquisition Discount on Bonds Payableissue Unamortized Bond Issue Costsissue Cash Bonds Payable Loss on Reacquisition Discount on Bonds Payableissue Cash Debit Face Amount (4.8.3) Loss (4.8.14) Credit

65

Amortization Amount (4.8.12) Unamortized Costs (4.8.13) Reacquisition Price (4.8.9) Credit

XX/XX/XX

Debit 700,000 8,712

23,712 685,000

4.10

Troubled Debt Restructuring

Example 36: Troubled Debt Restructuring: 20X1 Installment Note Amount = $6,000. Note Interest Rate = 10%. Interest in arrears = $600. New settlement payment = $1,100 for 7 years. Record the troubled debt restructuring journal entry with the rst $1,100 payment. Solution 36: 1. Debt Restructuring Carrying Amount (4.9.1) Debt Restructuring Carrying Amount = Debt Book Value + Unpaid Accrued Interest Debt Restructuring Carrying Amount = 6,000 + 600 = 6,600 2. New Eective Interest Rate (4.9.2) Solve for New Eective Interest Rate:

66

CHAPTER 4. LIABILITIES EXAMPLES Debt Restructuring Carrying Amount (4.9.1) = pva(New Payment Amount, New Eective Interest Rate, New Number of Payments) 6,600 = pva(1,100, New Eective Interest Rate, 7) New Eective Interest Rate = 0.04 3. Troubled Debt Identication (4.9.3) Since New Eective Interest Rate (4.9.2) of 0.04 < Original Eective Interest Rate of 0.10 then: The restructuring is a Troubled Debt Restructuring (4.9). 4. Sum New Cash Outows (4.9.4) Let n = the number of new future cash outows for debt payment. n Sum New Cash Outows = i=1 New Payment Amounti Sum New Cash Outows = 1,100 7 = 7,700 5. Sum New Cash Outows Is Higher Than Carry (4.9.6) Since Sum New Cash Outows (4.9.4) > Carrying Amount (4.9.1) then: Debit Credit XX/XX/XX Interest Payable Unpaid Accrued Interest Payableissue Unpaid Accrued Interest Debit Credit 20X1 Interest Payable 600 Payableissue 600 Interest Expense Amount = Payableissue Credit Balance New Eective Interest Rate (4.9.2) Interest Expense Amount = 6,600 0.04 = 264 New Amortization Amount = New Payment Amount Interest Expense Amount New Amortization Amount = 1,100 264 = 836 Debit Credit XX/XX/XX Interest Expense Interest Expense Amount Payableissue New Amortization Amount Cash New Payment Amount Debit Credit 20X1 Interest Expense 264 Payableissue 836 Cash 1,100

Chapter 5

Shareholders Equity Examples


5.1 Share Repurchase: Retirement Method

Example 37: Share Repurchase: Retirement Method Common Stock at Par Balance = $100,000,000. As of 6/1/X6, the rm had Issued and Outstanding 100,000,000 shares at $1 par. Common Stock at Excess Balance = $900,000,000. As of 6/1/X6, the rm had Issued and Outstanding 100,000,000 shares at $9 excess of par. Share Repurchase Gains Balance = $2,000,000. Retained Earnings Balance = $2,000,000,000. On 6/1/X6, the rm repurchased 1,000,000 shares at $13 per share = $13,000,000. Provide the Retirement Method buyback journal entry. Solution 37: 1. Common Stock Par Share Table (5.1.15) Date Quantity Issued Quantity Outstanding ??/??/?? 100,000,000 100,000,000 Par Value Per Share $1

2. Common Stock Additional Share Table (5.1.16) Date Quantity Issued Quantity Outstanding Price Per Additional Share ??/??/?? 100,000,000 100,000,000 $9 3. Retirement At Par Amount (5.3.1) Retirement At Par Amount = Shares Purchased Common Stock Par Share Table (5.1.15) Par Value Per Share Retirement At Par Amount = 1,000,000 1 = 1,000,000 4. Retirement At Excess Amount (5.3.2) Retirement At Excess Amount = Shares Purchased Common Stock Additional Share Table (5.1.16) Price Per Additional Share Retirement At Excess Amount = 1,000,000 9 = 9,000,000 5. Gain/(Loss) On Purchase (5.3.3) Gain/(Loss) On Purchase = [Retirement At Par Amount (5.3.1) + Retirement At Excess Amount (5.3.2)] Cash Paid Gain/(Loss) On Purchase = [1,000,000 + 9,000,000] 13,000,000 = -3,000,000 6. Retirement Retained Earnings Adjustment Amount (5.3.4) Since Gain/(Loss) On Purchase (5.3.3) < 0 then: Retirement Retained Earnings Adjustment Amount = |Gain/(Loss) On Purchase| (5.3.3) Share Repurchase Gains (5.1.17) Credit Balance Retirement Retained Earnings Adjustment Amount = |-3,000,000| 2,000,000 = 1,000,000 7. Share Repurchase Gains: Journal Entry (5.3.5) Since Gain/(Loss) On Purchase (5.3.3) < 0 and Retained Earnings Adjustment Amount (5.3.4) > 0 then: 67

68

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES Debit (5.3.1) (5.3.2) (5.1.17) Credit Balance (5.3.4) Credit Credit

XX/XX/XX

6/1/X6

Common Stock at Par (5.1.3) Common StockAdditional Paid-in Capital (5.1.4) Share Repurchase Gains (5.1.17) Retained Earnings (5.1.18) Cash Debit Common Stock at Par 1,000,000 Common StockAdditional Paid-in Capital 9,000,000 Share Repurchase Gains 2,000,000 Retained Earnings 1,000,000 Cash

Cash Paid

13,000,000

8. Common Stock Par Share Table (5.1.15) Date Quantity Issued Quantity Outstanding ??/??/?? 100,000,000 100,000,000 99,000,000

Par Value Per Share $1

9. Common Stock Additional Share Table (5.1.16) Date Quantity Issued Quantity Outstanding Price Per Additional Share ??/??/?? 100,000,000 100,000,000 99,000,000 $9

5.2

Share Repurchase: Treasury Method

Example 38: Share Repurchase: Treasury Method Common Stock at Par Balance = $100,000,000. As of 6/1/X6, the rm had Issued and Outstanding 100,000,000 shares at $1 par. Common Stock at Excess Balance = $900,000,000. As of 6/1/X6, the rm had Issued and Outstanding 100,000,000 shares at $9 excess of par. Share Repurchase Gains Balance = $2,000,000. Retained Earnings Balance = $2,000,000,000. On 6/1/X6, the rm repurchased 1,000,000 shares at $13 per share = $13,000,000. On 7/1/X6, the rm resold 1,000,000 shares at $10 per share = $10,000,000. Provide the Treasury Method buyback journal entry on 6/1/X6. Provide the Treasury Method resale journal entry on 7/1/X6. Solution 38: 1. Common Stock Par Share Table (5.1.15) Date Quantity Issued Quantity Outstanding ??/??/?? 100,000,000

Par Value Per Share $1

2. Common Stock Additional Share Table (5.1.16) Date Quantity Issued Quantity Outstanding Price Per Additional Share ??/??/?? 100,000,000 $9 3. Share Repurchase Cost Per Share (5.4.2) Cash Paid Share Repurchase Cost Per Share = Number of Shares Repurchased 13,000,000 Share Repurchase Cost Per Share = 1,000,000 = 13 4. Share Repurchase Journal Entry (5.4.3) XX/XX/XX Treasury Stock (5.4.1) Cash Debit Treasury Stock 13,000,000 Cash Debit Cash Paid Credit 13,000,000 Cost Per Share 13 Credit Cash Paid

6/1/X6

5. Treasury Stock Table (5.4.4) Date Quantity Repurchased 6/1/X6 1,000,000

Quantity Remaining 1,000,000

5.3. STOCK APPRECIATION PLAN: SIMPLE 6. Treasury Resale: Cost Amount (5.4.6) Treasury Resale: Cost Amount = Quantity Shares Sold Treasury Table (5.4.4) Cost Per Share Treasury Resale: Cost Amount = 1,000,000 13 = 13,000,000 7. Treasury Gain/(Loss) Amount (5.4.7) Treasury Gain/(Loss) Amount = Cash Received Treasury Resale: Cost Amount (5.4.6) Treasury Gain/(Loss) Amount = 10,000,000 13,000,000 = -3,000,000 8. Treasury Retained Earnings Adjustment Amount (5.4.8) Since Treasury Gain/(Loss) Amount (5.4.7) < 0 then: Treasury Retained Earnings Adjustment Amount = |Treasury Gain/(Loss) Amount| (5.4.7) Share Repurchase Gains (5.1.17) Credit Balance Treasury Retained Earnings Adjustment Amount = |-3,000,000| 2,000,000 = 1,000,000

69

9. Treasury Resale: Journal Entry (5.4.9) Since Gain/(Loss) Amount (5.4.7) < 0 and Retained Earnings Adjustment Amount (5.4.8) > 0 then: Debit Credit XX/XX/XX Cash Cash Received Share Repurchase Gains (5.1.17) (5.1.17) Credit Balance Retained Earnings (5.1.18) (5.4.8) Treasury Stock (5.4.1) (5.4.6) Debit Credit 7/1/X6 Cash 10,000,000 Share Repurchase Gains 2,000,000 Retained Earnings 1,000,000 Treasury Stock 13,000,000 10. Treasury Stock Table (5.4.4) Date Quantity Repurchased 6/1/X6 1,000,000 Quantity Remaining 1,000,000 0 Cost Per Share 13

5.3

Stock Appreciation Plan: Simple


For Louis Armstrong

Example 39: Stock Appreciation Plan Grant Date = 1/1/X4. Grant Date Price Per Share = $10. Plan Rights Quantity = 1,000. Vesting Date = 12/31/X6. Exercise Date = 6/30/X7. Exercise Date Price Per Share = $18. Right and Market Values are: Date Right Value Market 12/31/20X4 $6.00 12/31/20X5 8.00 12/31/20X6 7.50 6/30/20X7 8.00

Value 16.00 18.00 17.50 18.00

What is the compensation expense for 20X6? What is the compensation expense for 20X7? Solution 39: 1. Service Period Years (5.17.3) Service Period Years = Years between Grant Date and Vesting Date Service Period Years = 3 2. Service Period Completed Percent (5.17.5): 12/31/X4 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 1 Service Period Completed Percent = 3

70

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES 3. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Louis Armstrong) Balance = [16.00 10.00] 1,000 1 3 = 2,000 4. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 2,000 0 = 2,000 5. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X4 Compensation Expense 2,000 Stock Appreciation Plan Liability for Louis Armstrong 2,000 Ledger Stock Appreciation Plan Liability for Louis Armstrong 12/31/X4 2,000 balance 2,000 6. Service Period Completed Percent (5.17.5): 12/31/X5 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 2 Service Period Completed Percent = 3 7. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Louis Armstrong) Balance = [18.00 10.00] 1,000 2 3 = 5,333 8. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 5,333 2,000 = 3,333 9. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X5 Compensation Expense 3,333 Stock Appreciation Plan Liability for Louis Armstrong 3,333 Ledger Stock Appreciation Plan Liability for Louis Armstrong 12/31/X4 2,000 12/31/X5 3,333 balance 5,333

10. Service Period Completed Percent (5.17.5): 12/31/X6 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 3 = 1.0 Service Period Completed Percent = 3

5.3. STOCK APPRECIATION PLAN: SIMPLE 11. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Louis Armstrong) Balance = [17.50 10.00] 1,000 1.0 = 7,500 12. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 7,500 5,333 = 2,167 Stock Appreciation Plan Expense for 20X6 = $2,167 13. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X6 Compensation Expense 2,167 Stock Appreciation Plan Liability for Louis Armstrong 2,167 Ledger Stock Appreciation Plan Liability for Louis Armstrong 12/31/X4 2,000 12/31/X5 3,333 12/31/X6 2,167 balance 7,500 14. Service Period Completed Percent (5.17.5): 6/30/X7 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 3 Service Period Completed Percent = 3 = 1.0 15. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Louis Armstrong) Balance = [18.00 10.00] 1,000 1.0 = 8,000 16. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 8,000 7,500 = 500 Stock Appreciation Plan Expense for 20X7 = $500 17. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X7 Compensation Expense 500 Stock Appreciation Plan Liability for Louis Armstrong 500 Ledger

71

72

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES Stock Appreciation Plan Liability for Louis Armstrong 12/31/X4 2,000 12/31/X5 3,333 12/31/X6 2,167 6/30/X7 500 balance 8,000

5.4

Stock Appreciation Plan: Comprehensive

Example 40: Stock Appreciation Plan For Jimmy Stewart Grant Date = 1/1/X1. Grant Date Price Per Share = $10. Plan Rights Quantity = 5,000. Vesting Date = 12/31/X4. Expiration Date = 12/31/X6. Exercise Date = 12/31/X4. Year End Market Prices are: 20X1 $11.00 13.50 20X2 20X3 12.00 20X4 14.00 Prepare all of the journal entries. Solution 40: 1. Service Period Years (5.17.3) Service Period Years = Years between Grant Date and Vesting Date Service Period Years = 4 2. Service Period Completed Percent (5.17.5): 12/31/X1 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 1 = 0.25 Service Period Completed Percent = 4 3. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Jimmy Stewart) Balance = [11.00 10.00] 5,000 0.25 = 1,250 4. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 1,250 0 = 1,250 5. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X1 Compensation Expense 1,250 Stock Appreciation Plan Liability for Jimmy Stewart 1,250 Ledger Stock Appreciation Plan Liability for Jimmy Stewart 12/31/X1 1,250 balance 1,250

5.4. STOCK APPRECIATION PLAN: COMPREHENSIVE 6. Service Period Completed Percent (5.17.5): 12/31/X2 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 2 = 0.50 Service Period Completed Percent = 4 7. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Jimmy Stewart) Balance = [13.50 10.00] 5,000 0.50 = 8,750 8. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 8,750 1,250 = 7,500 9. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) > 0 then: Debit Credit 12/31/XX Compensation Expense (5.17.7) Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Debit Credit 12/31/X2 Compensation Expense 7,500 Stock Appreciation Plan Liability for Jimmy Stewart 7,500 Ledger Stock Appreciation Plan Liability for Jimmy Stewart 12/31/X1 1,250 12/31/X2 7,500 balance 8,750 10. Service Period Completed Percent (5.17.5): 12/31/X3 Years Participation Before Vesting Date Service Period Completed Percent = Service Period Years (5.17.3) 3 = 0.75 Service Period Completed Percent = 4 11. Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciatin Plan Liabilityemployee Balance = [Current Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Service Period Completed Percent (5.17.5) Stock Appreciatin Plan Liability (Jimmy Stewart) Balance = [12.00 10.00] 5,000 0.75 = 7,500 12. Stock Appreciation Plan Expense Amount (5.17.7) Stock Appreciation Plan Expense Amount = Stock Appreciation Plan Liabilityemployee Balance (5.17.6) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Stock Appreciation Plan Expense Amount = 7,500 8,750 = -1,250 13. Stock Appreciation Expense Journal Entry (5.17.8) Since Stock Appreciation Plan Expense Amount (5.17.7) < 0 then: Debit Credit 12/31/XX Stock Appreciation Plan Liabilityemployee (5.17.4) (5.17.7) Compensation Expense (5.17.7) Debit Credit 12/31/X3 Stock Appreciation Plan Liability for Jimmy Stewart 1,250 Compensation Expense 1,250 Ledger

73

74

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES Stock Appreciation Plan Liability for Jimmy Stewart 12/31/X1 1,250 12/31/X2 7,500 12/31/X3 1,250 balance 7,500

14. Benet To Employee (5.17.2): 12/31/X4 Benet To Employee = [Exercise Date Price Per Share Grant Date Price Per Share] Plan Rights Quantityemployee (5.17.1) Benet To Employee = [14.00 10.00] 5,000 = 20,000 15. Employee Exercises Rights (5.17.9): 12/31/X4 Expense Amount = Benet To Employee (5.17.2) Stock Appreciation Plan Liabilityemployee (5.17.4) Credit Balance Expense Amount = 20,000 7,500 = 12,500 Since Expense Amount > 0 then: XX/XX/XX Compensation Expense Stock Appreciation Plan Liabilityemployee (5.17.4) Cash Compensation Expense Stock Appreciation Plan Liability for Jimmy Stewart Cash Debit Expense Amount (5.17.4) Credit Balance Debit 12,500 7,500 Credit Credit

(5.17.2)

12/31/X4

20,000

Ledger Stock Appreciation Plan Liability for Jimmy Stewart 12/31/X1 1,250 12/31/X2 7,500 12/31/X3 1,250 12/31/X4 7,500 balance 0

5.5

Basic and Diluted Earnings Per Share

Example 41: Basic Earnings Per Share and Diluted Earnings Per Share Net Income = $80,000. Weighted-Average Common Shares Outstanding = 22,000. Preferred Shares Outstanding = 3,000. Preferred Shares Dividend Rate = 5%. Preferred Shares Par Value = $100. Each Preferred Share Converts To Common = 5. Preferred Dividends were declared. What is the Basic Earnings Per Share? What is the Diluted Earnings Per Share? Solution 41: 1. Preferred Dividends Declared (5.10.1) Preferred Dividends = Preferred Shares Outstanding Preferred Shares Dividend Rate Preferred Shares Par Value Preferred Dividends = 3,000 0.05 100 = 15,000 2. EPS Preferred Dividends (5.10.2) Since Preferred Dividends are not Cumulative then: EPS Preferred Dividends = Preferred Dividends Declared (5.10.1) EPS Preferred Dividends = 15,000

5.6. BASIC EARNINGS PER SHARE: FLUCTUATING OUTSTANDING 3. Basic Earnings Per Share (5.10.5) Net Income EPS Preferred Dividends (5.10.2) Basic Earnings Per Share = Weighted-Average Common Shares Outstanding (5.10.3) 18,000 15,000 Basic Earnings Per Share = = $3.25 20,000 Basic Earnings Per Share = $3.25. 4. Diluted Earnings Per Share (5.12.1) Diluted Earnings Per Share = Net Income Weighted-Average Outstanding (5.10.3) + {Converted Common Shares [1 + Non-Asset Distribution (5.6)]} Diluted Earnings Per Share = 80,000 = $2.29 20,000 + {(3,000 5) [1 + 0]} Diluted Earnings Per Share = $2.29.

75

5.6

Basic Earnings Per Share: Fluctuating Outstanding

Example 42: Basic Earnings Per Share: Fluctuating Outstanding Net Income = $154,000,000. Preferred Dividends Declared = $4,000,000. Capital Structure for Common Stock: Jan. 1 Common shares outstanding = 60 million Mar. 1 New shares sold = 12 million Jun. 17 Stock dividend distributed = 10% Oct. 1 Repurchase treasury shares = 8 million What is the Basic Earnings Per Share? Solution 42: 1. Weighted-Average Common Shares Outstanding Table (5.10.4): Jan. 1 Feb. 28 Shares Non-Asset Distribution Fraction of Weighted Shares Year (3) (1) (2) (3) Month Range Outstanding (1) Multiplier (2)
12 = 12 i=1 = WACSO Shares Non-Asset Distribution Fraction of Weighted Shares Month Range Outstanding (1) Multiplier (2) Year (3) (1) (2) (3) 2 Jan. 1 Feb. 28 60,000,000 1.1 11,000,000 12 The Non-Asset Distribute Multiplier is 1.1 because a 10% stock dividend occurred subsequently. n i=1 n

2. Weighted-Average Common Shares Outstanding Table (5.10.4): Mar. 1 Jun. 16 Shares Non-Asset Distribution Fraction of Weighted Shares Month Range Outstanding (1) Multiplier (2) Year (3) (1) (2) (3) 2 Jan. 1 Feb. 28 60,000,000 1.1 11,000,000 12 3.5 Mar. 1 Jun. 16 72,000,000 1.1 23,100,000 12 The new shares issued increased the Outstanding Shares to 72,000,000 for 3.5 months. The Non-Asset Distribute Multiplier is 1.1 because a 10% stock dividend occurred subsequently. 3. Weighted-Average Common Shares Outstanding Table (5.10.4): Jun. 17 Sept. 30 Shares Non-Asset Distribution Fraction of Weighted Shares Month Range Outstanding (1) Multiplier (2) Year (3) (1) (2) (3) 2 Jan. 1 Feb. 28 60,000,000 1.1 11,000,000 12 3.5 Mar. 1 Jun. 16 72,000,000 1.1 23,100,000 12 3.5 Jun. 17 Sep. 30 79,200,000 1.0 23,100,000 12 A 10% stock dividend increased the Outstanding Shares by 7,200,000 for 3.5 months. 4. Weighted-Average Common Shares Outstanding Table (5.10.4): Oct. 1 Dec. 31

76 Shares Outstanding (1) 60,000,000 72,000,000 79,200,000 71,200,000

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES Fraction of Weighted Shares Year (3) (1) (2) (3) 2 11,000,000 12 3.5 23,100,000 12 3.5 23,100,000 12 3 17,800,000 12 12 Sum 75,000,000 12 Purchasing 8,000,000 of treasury shares increase the Outstanding Shares to 71,200,000 for the nal three months of the year. The Weighted-Average Common Shares Outstanding is therefore 75,000,000 shares. Month Range Jan. 1 Feb. 28 Mar. 1 Jun. 16 Jun. 17 Sep. 30 Oct. 1 Dec. 31 5. Weighted-Average Common Shares Outstanding (5.10.3) Let n = the number of month ranges where Shares Outstanding (5.1.1) was consistent. Weighted-Average Common Shares Outstanding = n i=1 {Shares Outstanding [1 + Non-Asset Distribution (5.6) occuring subsequently]}i Months During Periodi 12 Weighted-Average Common Shares Outstanding = 75,000,000 6. Basic Earnings Per Share (5.10.5) Net Income EPS Preferred Dividends (5.10.2) Basic Earnings Per Share = Weighted-Average Common Shares Outstanding (5.10.3) 154,000,000 4,000,000 Basic Earnings Per Share = = $2.00 75,000,000 Non-Asset Distribution Multiplier (2) 1.1 1.1 1.0 1.0

5.7

Interim Financial Statements


Debit 5,890 1,370 2,850 30 90 1,500 2,250 5,600 1,850 15,500 1,200 3,600 10,160 1,000 3,845 1,395 6,000 6,500 2,300 300 42,030 42,030 Credit 10,830

Example 43: Interim Financial Statements Given the following trial balance: Account Sales Cost of Goods Sold Selling Expenses General Expenses Ordinary Loss Preacquisition Earnings Cash Accounts Receivable Inventory Other Current Assets PP&E Patent Other Non-Current Assets Current Liabilities (including Dividends Payable) Long-term Note Bonds @ 7% (net) Bonds @ 8% (net) Common @ Par Additional Paid-in Capital Retained Earnings Dividends Declared Prepare the Statement Trial Balance. Solution 43:

1. Pro-forma Net Income (5.18.1) n Pro-forma Net Income = + i=1 Net Revenuei Credit Balance n i=1 Expensei Debit Balance n + i=1 Gaini Credit Balance n i=1 Lossi Debit Balance Preacquisition Earnings (8.2.5) Debit Balance

5.7. INTERIM FINANCIAL STATEMENTS Account Sales Cost of Goods Sold Selling Expenses General Expenses Ordinary Loss Preacquisition Earnings Pro-forma Net Income Debit 5,890 1,370 2,850 30 90 600 (5.18.1) (1) Credit 10,830 Statement

77

2. Book Value Equity (5.18.2) n Book Value Equity = i=1 Equityi Credit Balance Debit Credit Statement Account Common @ Par 6,000 Additional Paid-in Capital 6,500 Retained Earnings 2,300 Book Value Equity 14,800 (5.18.2) (6) 3. Current Equity (5.18.3) Current Equity = + Book Value Equity (5.18.2) + Pro-forma Net Income (5.18.1) Dividends Declared Debit Balance + Non-Controlling Interest (8.2.2) Current Equity =

14,800 600 300 0 15,100

4. Current Retained Earnings (5.18.4) Current Retained Earnings = + Pro-forma Net Income (5.18.1) + Retained Earnings Credit Balance Dividends Declared Debit Balance Current Retained Earnings = 5. Statement Trial Balance (5.18.5) Template Account Debit Credit Net Revenue1 Amount1 ... Expense1 Amount1 ... Gain1 Amount1 ... Loss1 Amount1 ... Preacquisition Earnings (8.2.5) Amount Pro-forma Net Income Retained Earnings Dividends Declared Amount (3) Current Retained Earnings Net Asset1 Amount1 ... Total Assets Net Liability1 Amount1 ... Total Liabilities Equity1 Amount1 ... Book Value Equity Pro-form Net Income Dividends Declared Non-Controlling Interest (8.2.2) Amount (7) Current Equity

600 2,300 300 2,600

Statement

(5.18.1) (1) Credit Balance (2) (1) + (2) (3) = (5.18.4)


n i=1

Asseti (4)

n i=1

Liabilityi (5)

(5.18.2) (6) (5.18.1) (1) -Debit Balance (3) (6) + (1) (3) + (7) = (5.18.3) (4) = (5) + (5.18.3)

78

CHAPTER 5. SHAREHOLDERS EQUITY EXAMPLES 6. Statement Trial Balance (5.18.5) Presentation Account Debit Sales Cost of Goods Sold 5,890 Selling Expenses 1,370 General Expenses 2,850 Ordinary Loss 30 Preacquisition Earnings 90 Pro-forma Net Income Retained Earnings Dividends Declared 300 Current Retained Earnings Cash 1,500 Accounts Receivable 2,250 Inventory 5,600 Other Current Assets 1,850 PP&E 15,500 Patent 1,200 Other Non-current Assets 3,600 Total Assets Current Liabilities (including Dividends Payable) Long-term Note Bonds @ 7% (net) Bonds @ 8% (net) Total Liabilities Common @ Par Additional Paid-in Capital Retained Earnings Book Value Equity Pro-form Net Income Dividends Declared Current Equity 42,030

Credit 10,830

Statement

600 2,300 2,600

31,500 10,160 1,000 3,845 1,395 16,400 6,000 6,500 2,300 14,800 600 -300 15,100 42,030

Chapter 6

Statement of Cash Flows Examples


6.1 Indirect Method Presentation: Simple

Example 44, 20X3: Net Income = 34,000. Cash Beginning Balance = 0. Cash Ending Balance = 49,000. Accounts Receivable Beginning Balance = 0. Accounts Receivable Ending Balance = 36,000. Accounts Payable Beginning Balance = 0. Accounts Payable Ending Balance = 5,000. Common Stock Beginning Balance = 0. Common Stock Ending Balance = 60,000. Cash Dividends Paid = 14,000. Prepare the Statement of Cash Flows using the Indirect Method. Solution 44: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 49,000 0 = 49,000 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 36,000 0 = 36,000 3. Change In Accounts Payable (6.2.13) Change In Accounts Payable = Accounts Payable Ending Balance Accounts Payable Beginning Balance Change In Accounts Payable = 5,000 0 = 5,000 4. Cash Provided By Operating Activities (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) + Change In Accounts Payable (6.2.13) Cash Provided By Operating Activities = 34,000 36,000 + 5,000 = 3,000 5. Financing Cash Flows (6.5) Cash Financing Activity = Equity, Loan, or Bond Ending Balance Equity, Loan, or Bond Beginning Balance 79

80

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES Issuance of Common Stock = Common Stock Ending Balance Common Stock Beginning Balance Issuance of Common Stock = 60,000 0 = 60,000 6. Cash Provided By Financing Activities (6.5.2) Cash Provided By Financing Activities = + Issuance of Common Stock Cash Dividends Paid Cash Provided By Financing Activities = 60,000 14,000 = 46,000 7. Net Increase In Cash (6.5.3) Net Increase In Cash = + Cash Provided By Operating Activities (6.3.13) + Cash Provided By Investing Activities (6.4.3) + Cash Provided By Financing Activities (6.5.2) = Change In Cash (6.1) Net Increase In Cash = + 3,000 +0 + 46,000 = 49,000 8. Statement of Cash Flows (6.6) Cash ows from operating activities Net Income Increase in accounts receivable Increase in accounts payable Net cash provided by operating activities Cash ows from nancing activities Issuance of common stock Cash dividends paid Net cash provided by nancing activities Net increase in cash Cash, Beginning Balance Cash, Ending Balance 60,000 (14,000) Given Given 46,000 49,000 0 49,000 (6.5.2) (6.5.3) or (6.1) 34,000 (36,000) 5,000

(6.2.1) (6.2.13) 3,000 (6.3.13)

6.2

Indirect Method Presentation: Complex

Example 45, 20X4: Net Income = 134,000. Cash Beginning Balance = 49,000. Cash Ending Balance = 37,000. Accounts Receivable Beginning Balance = 36,000. Accounts Receivable Ending Balance = 26,000. Prepaid Expenses Beginning Balance = 0. Prepaid Expenses Ending Balance = 6,000. Accounts Payable Beginning Balance = 5,000. Accounts Payable Ending Balance = 40,000. Depreciation Expense = 21,000. Land Beginning Balance = 0. Land Ending Balance = 70,000. Building Beginning Balance = 0. Building Ending Balance = 200,000. Equipment Beginning Balance = 0. Equipment Ending Balance = 68,000.

6.2. INDIRECT METHOD PRESENTATION: COMPLEX Bonds Payable Beginning Balance = 0. Bonds Payable Ending Balance = 150,000. Cash Dividends Paid = 18,000. Prepare the Statement of Cash Flows using the Indirect Method. Solution 45: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 37,000 49,000 = -12,000 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 26,000 36,000 = -10,000 3. Change In Prepaid Expenses (6.2.6) Change In Prepaid Expenses = Prepaid Expenses Ending Balance Prepaid Expenses Beginning Balance Change In Prepaid Expenses = 6,000 0 = 6,000 4. Change In Accounts Payable (6.2.13) Change In Accounts Payable = Accounts Payable Ending Balance Accounts Payable Beginning Balance Change In Prepaid Expenses = 40,000 5,000 = 35,000 5. Cash Provided By Operating Activities (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) Change In Prepaid Expenses (6.2.6) + Depreciation Expense (6.3.11) + Change In Accounts Payable (6.2.13) Cash Provided By Operating Activities = 134,000 -10,000 6,000 + 21,000 + 35,000 = 194,000 6. Investing Cash Flows (6.4) Cash Investing Activity = Property, Plant, or Equipment Ending Balance Property, Plant, or Equipment Beginning Balance Cash Portion of Purchase of Property (Land) = Land Ending Balance Land Beginning Balance Cash Portion of Purchase of Property (Land) = 70,000 0 = 70,000 7. Investing Cash Flows (6.4) Cash Investing Activity = Property, Plant, or Equipment Ending Balance Property, Plant, or Equipment Beginning Balance Cash Portion of Purchase of Plant (Building) = Building Ending Balance Building Beginning Balance Cash Portion of Purchase of Plant (Building) = 200,000 0 = 200,000 8. Investing Cash Flows (6.4) Cash Investing Activity = Property, Plant, or Equipment Ending Balance Property, Plant, or Equipment Beginning Balance Cash Portion of Purchase of Equipment = Equipment Ending Balance Equipment Beginning Balance Cash Portion of Purchase of Equipment = 68,000 0 = 68,000

81

82

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES 9. Cash Provided By Investing Activities (6.4.3) Cash Provided By Investing Activities = Cash Portion of Purchase Cash Portion of Purchase Cash Portion of Purchase Cash Provided By Investing Activities = 70,000 200,000 68,000

of Property (Land) of Plant (Building) of Equipment = -338,000

10. Financing Cash Flows (6.5) Cash Financing Activity = Equity, Loan, or Bond Ending Balance Equity, Loan, or Bond Beginning Balance Issuance of Bonds = Bonds Payable Ending Balance Bonds Payable Beginning Balance Issuance of Bonds = 150,000 0 = 150,000 11. Cash Provided By Financing Activities (6.5.2) Cash Provided By Financing Activities = + Issuance of Bonds Cash Dividends Paid Cash Provided By Financing Activities = 150,000 18,000 = 132,000 12. Net Increase In Cash (6.5.3) Net Increase In Cash = + Cash Provided By Operating Activities (6.3.13) + Cash Provided By Investing Activities (6.4.3) + Cash Provided By Financing Activities (6.5.2) = Change In Cash (6.1) Net Increase In Cash = 194,000 + -338,000 + 132,000 = -12,000 13. Statement of Cash Flows (6.6) Cash ows from operating activities Net Income Increase in accounts receivable Increase in prepaid expenses Depreciation expense (add)Increase in accounts payable Net cash provided by operating activities Cash ows from investing activities Cash outow of purchase of land Cash outow of purchase of building Cash outow of purchase of equipment Net cash provided by investing activities Cash ows from nancing activities Issuance of bonds Cash dividends paid Net cash provided by nancing activities Net increase in cash Cash, Beginning Balance Cash, Ending Balance 150,000 (18,000) 132,000 (12,000) 49,000 37,000 (6.5.2) (6.5.3) or (6.1) (70,000) (200,000) (68,000) (338,000) (6.4.3) 134,000 (10,000) (6,000) 21,000 35,000

(6.2.1) (6.2.6) (6.3.11) (6.2.13) 194,000 (6.3.13)

6.3

Indirect Method Presentation: Complex

Example 46, 20X5: Net Income = 125,000.

6.3. INDIRECT METHOD PRESENTATION: COMPLEX Cash Beginning Balance = 37,000. Cash Ending Balance = 54,000. Accounts Receivable Beginning Balance = 26,000. Accounts Receivable Ending Balance = 68,000. Inventory Beginning Balance = 0. Inventory Ending Balance = 54,000. Prepaid Expenses Beginning Balance = 6,000. Prepaid Expenses Ending Balance = 4,000. Accounts Payable Beginning Balance = 40,000. Accounts Payable Ending Balance = 33,000. Bonds Payable Beginning Balance = 150,000. Bonds Payable Ending Balance = 110,000. Depreciation Expense = 33,000. Prepaid Expense Amortization = 2,000. Land Beginning Balance = 70,000. Land Ending Balance = 45,000. Equipment Beginning Balance = 68,000. Equipment Ending Balance = 193,000. Building Beginning Balance = 200,000. Building Ending Balance = 200,000. Bonds Payable Beginning Balance = 0. Bonds Payable Ending Balance = 150,000. Common Stock Beginning Balance = 60,000. Common Stock Ending Balance = 220,000. Land was sold at book value for cash. Cash Dividends Paid = 55,000. Cash paid for interest on bonds = 12,000. Cash paid for equipment = 166,000. Cash received for sale of equipment = 34,000. Equipment sold had cost of = 41,000. Equipment sold had book value of = 36,000. Prepare the Statement of Cash Flows using the Indirect Method. Solution 46: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 54,000 37,000 = 17,000 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 68,000 26,000 = 42,000 3. Change In Inventory (6.2.5) Change In Inventory = Inventory Ending Balance Inventory Beginning Balance Change In Inventory = 54,000 0 = 54,000 4. Change In Prepaid Expenses (6.2.6) Change In Prepaid Expenses = Prepaid Expenses Ending Balance Prepaid Expenses Beginning Balance Change In Prepaid Expenses = 4,000 6,000 = -2,000 5. Change In Accounts Payable (6.2.13) Change In Accounts Payable = Accounts Payable Ending Balance Accounts Payable Beginning Balance Change In Accounts Payable = 33,000 40,000 = -7,000

83

84

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES 6. Gain or (Loss) on PP&E Sale (6.3.10) Gain or (Loss) on PP&E Sale = Cash Received Book Value Gain or (Loss) on PP&E Sale = 34,000 36,000 = -2,000 7. Cash Provided By Operating Activities (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) Change In Inventory (6.2.5) Change In Prepaid Expenses (6.2.6) Gain or (Loss) on PP&E Sale (6.3.10) + Depreciation Expense (6.3.11) + Change In Accounts Payable (6.2.13) Cash Provided By Operating Activities = 125,000 Net Income 42,000 (6.2.1) 54,000 (6.2.5) -2,000 (6.2.6) -2,000 (6.3.10) + 33,000 (6.3.11) + -7,000 (6.2.13) = 59,000 8. Investing Cash Flows (6.4) Cash Investing Activity = Property, Plant, or Equipment Ending Balance Property, Plant, or Equipment Beginning Balance Cash Portion of Purchase of Property (Land) = Land Ending Balance Land Beginning Balance Cash Portion of Sale of Property (Land) = 45,000 70,000 = -25,000 Note: Cash inows will have a negative balance. 9. Cash Provided By Investing Activities (6.4.3) Cash Provided By Investing Activities = + Cash Portion of Sale of Property (Land) + Cash Portion of Sale of Equipment Cash Portion of Purchase of Equipment Cash Provided By Investing Activities = 25,000 + 34,000 166,000 = -107,000

10. Financing Cash Flows (6.5) Cash Financing Activity = Equity, Loan, or Bond Ending Balance Equity, Loan, or Bond Beginning Balance Issuance of Common Stock = Common Stock Ending Balance Common Stock Beginning Balance Issuance of Common Stock = 220,000 60,000 = 160,000 11. Financing Cash Flows (6.5) Cash Financing Activity = Equity, Loan, or Bond Ending Balance Equity, Loan, or Bond Beginning Balance Redemption of Bonds = Bonds Payable Ending Balance Bonds Payable Beginning Balance Redemption of Bonds = 110,000 150,000 = -40,000 12. Cash Provided By Financing Activities (6.5.2) Cash Provided By Financing Activities = + Issuance of Common Stock Redemption of Bonds Cash Dividends Paid Cash Provided By Financing Activities = 160,000 40,000 55,000 = 65,000 13. Net Increase In Cash (6.5.3) Net Increase In Cash = + Cash Provided By Operating Activities (6.3.13) + Cash Provided By Investing Activities (6.4.3) + Cash Provided By Financing Activities (6.5.2) = Change In Cash (6.1)

6.4. DIRECT METHOD PRESENTATION: COMPLEX Net Increase In Cash = 59,000 + -107,000 + 65,000 = 17,000 14. Statement of Cash Flows (6.6) Cash ows from operating activities Net Income Increase in accounts receivable Increase in inventory Decease in prepaid expenses Depreciation expense Decrease in accounts payable Loss on PP&E sale Net cash provided by operating activities Cash ows from investing activities Cash inow of sale of land Cash inow of sale of equipment Cash outow of purchase of equipment Net cash provided by investing activities Cash ows from nancing activities Issuance of common stock Redemption of bonds Cash dividends paid Net cash provided by nancing activities Net increase in cash Cash, Beginning Balance Cash, Ending Balance 160,000 (40,000) (55,000) Given Given Given 65,000 17,000 37,000 54,000 (6.5.2) (6.5.3) or (6.1) 25,000 34,000 (166,000) (6.4) Given Given (107,000) (6.4.3) 125,000 (42,000) (54,000) 2,000 33,000 (7,000) 2,000

85

(6.2.1) (6.2.5) (6.2.6) (6.3.11) (6.2.13) (6.3.10) 59,000 (6.3.13)

6.4

Direct Method Presentation: Complex

Example 47, 20X3: Sales Revenues = 780,000. Cost of Goods Sold = 450,000. Operating Expenses = 160,000. Depreciation Expense = 10,000. Income Tax Expense = 48,000. Cash Beginning Balance = 0. Cash Ending Balance = 159,000. Accounts Receivable Beginning Balance = 0. Accounts Receivable Ending Balance = 15,000. Inventory Beginning Balance = 0. Inventory Ending Balance = 160,000. Prepaid Expenses Beginning Balance = 0. Prepaid Expenses Ending Balance = 8,000. Property, Plant, and Equipment Beginning Balance = 0. Property, Plant, and Equipment Ending Balance = 90,000. Accounts Payable Beginning Balance = 0. Accounts Payable Ending Balance = 60,000. Accrued Expenses Payable Beginning Balance = 0. Accrued Expenses Payable Ending Balance = 20,000. Net Income = 112,000.

86

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES

Prepare the Operating Section of the Statement of Cash Flows using the Direct Method. Prepare the Reconciliation of Operating Activities. Solution 47: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 159,000 0 = 159.000 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 15,000 0 = 15,000 3. Change In Inventory (6.2.5) Change In Inventory = Inventory Ending Balance Inventory Beginning Balance Change In Inventory = 160,000 0 = 160,000 4. Change In Prepaid Expenses (6.2.6) Change In Prepaid Expenses = Prepaid Expenses Ending Balance Prepaid Expenses Beginning Balance Change In Prepaid Expenses = 8,000 0 = 8,000 5. Change In Accrued Expenses Payable (6.2.10) Change In Accrued Expenses Payable = Accrued Expenses Payable Ending Balance Accrued Expenses Payable Beginning Balance Change In Accrued Expenses Payable = 20,000 0 = 20,000 6. Change In Accounts Payable (6.2.13) Change In Accounts Payable = Accounts Payable Ending Balance Accounts Payable Beginning Balance Change In Accounts Payable = 60,000 0 = 60,000 7. Change In Taxes Payable (6.2.15) Change In Taxes Payable = Taxes Payable Ending Balance Taxes Payable Beginning Balance Change In Taxes Payable = 0 0 = 0 8. Cash Received From Customers (6.3.1) Cash Received From Customers = Sales Revenues Change In Accounts Receivable (6.2.1) Cash Received From Customers = 780,000 15,000 = 765,000 9. Cash Paid To Suppliers (6.3.6) Cash Paid To Suppliers = Costs Of Goods Sold + Change In Inventory (6.2.5) Change In Accounts Payable (6.2.13) Cash Paid To Suppliers = 450,000 + 160,000 60,000 = 550,000 10. Cash Paid For Operations (6.3.7) Cash Paid For Operations = Operating Expenses + Change In Prepaid Expenses (6.2.6) Change In Accrued Expenses Payable (6.2.10) Cash Paid For Operations = 160,000 + 8,000 20,000 = 148,000 11. Cash Paid For Taxes (6.3.8) Cash Paid For Taxes = Taxes Expense Change In Taxes Payable (6.2.15) Cash Paid For Taxes = 48,000 0 = 48,000

6.4. DIRECT METHOD PRESENTATION: COMPLEX 12. Cash Provided By Operating Activities: Direct Method (6.3.12) Cash Provided By Operating Activities = + Cash Received From Customers (6.3.1) + Cash Received From Interest and Dividends (6.3.2) Cash Paid To Suppliers (6.3.6) Cash Paid For Operations (6.3.7) Cash Paid For Taxes (6.3.8) Cash Provided By Operating Activities = 765,000 + 0 550,000 148,000 48,000 = 19,000

87

13. Operating Section: Direct Method (6.6.1) Cash ows from operating activities (add)Cash received from customers (6.3.1) (add)Cash received from interest and dividends (6.3.2) (less)Cash paid to suppliers (6.3.6) (less)Cash paid for operations (6.3.7) (less)Cash paid for taxes (6.3.8) Net cash provided by operating activities Cash ows from operating activities Cash Cash Cash Cash received from customers paid to suppliers paid for operations paid for taxes 765,000 (550,000) (148,000) (48,000) 19,000 (6.3.12)

Net cash provided by operating activities

14. Cash Provided By Operating Activities: Indirect Method (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) Change In Inventory (6.2.5) Change In Prepaid Expenses (6.2.6) + Change In Accounts Payable (6.2.13) + Change In Accrued Expenses Payable (6.2.10) + Depreciation Expense (6.3.11) Cash Provided By Operating Activities = 112,000 15,000 160,000 8,000 + 60,000 + 20,000 + 10,000 = 19,000

15. Operating Section: Indirect Method (6.6.2) Reconciliation of Operating Activities Net Income Net Income (less)Increase in accounts receivable (6.2.1) (less)Increase in inventory (6.2.5) (less)Increase in prepaid expenses (6.2.6) (add)Increase in accounts payable (6.2.13) (add)Increase in accrued expenses payable (6.2.10) (add)Depreciation expense (6.3.11) Net cash provided by operating activities (6.3.13)

88 Reconciliation of Operating Activities Net Income Increase in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Increase in accrued expenses payable Depreciation expense Net cash provided by operating activities

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES

112,000 (15,000) (160,000) (8,000) 60,000 20,000 10,000 19,000

6.5. CASH FLOW CALCULATIONS: SIMPLE

89

6.5

Cash Flow Calculations: Simple


Comparative Balance Sheets Cash A/R Prepaid Rent Equipment Accumulated Depreciation Total Assets Wages Payable Capital Stock Retained Earnings Liabilities + Equity 20X5 $100 50 70 300 (75) $445 30 200 215 $445 20X6 $155 75 50 400 (150) $530 10 230 290 $530

Example 48, 20X6:

Income Statement 20X6 Service Revenue $400 Wages Expense (125) Rent Expense (100) Depreciation Expense (75) Net Income $100

Show Show Show Show Show

the the the the the

Cash Provided By Operating Activities: Direct Method. Cash Provided By Investing Activities. Cash Provided By Financing Activities. Net Increase In Cash. Cash Provided By Operating Activities: Indirect Method.

Solution 48: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 155 100 = 55 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 75 50 = 25 3. Cash Received From Customers (6.3.1) Cash Received From Customers = Sales Revenues Change In Accounts Receivable (6.2.1) + Change In Unearned Revenue (6.2.9) Cash Received From Customers = 400 25 + 0 = 375 4. Change In Salary/Wages Payable (6.2.14) Change In Salary/Wages Payable = Salary/Wages Payable Ending Balance Salary/Wages Payable Beginning Balance Change In Salary/Wages Payable = 10 30 = -20 5. Cash Paid To Employees (6.3.3) Cash Paid To Employees = Salary Expense Change In Salary/Wages Payable (6.2.14) Cash Paid To Employees = 125 -20 = 145 6. Change In Prepaid Rent (6.2.7) Change In Prepaid Rent = Prepaid Rent Ending Balance Prepaid Rent Beginning Balance Change In Prepaid Rent = 50 70 = -20 7. Cash Paid For Rent (6.3.4) Cash Paid For Rent = Rent Expense + Change In Prepaid Rent (6.2.7) Cash Paid For Rent = 100 + -20 = 80

90

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES 8. Cash Provided By Operating Activities: Direct Method (6.3.12) Cash Provided By Operating Activities = + Cash Received From Customers (6.3.1) + Cash Received From Interest and Dividends (6.3.2) Cash Paid To Employees (6.3.3) Cash Paid To Suppliers (6.3.6) Cash Paid For Rent (6.3.4) Cash Paid For Operations (6.3.7) Cash Paid For Taxes (6.3.8) Cash Paid For Interest (6.3.9) Cash Provided By Operating Activities = + 375 145 80 = 150 9. Investing Cash Flows (6.4) Cash Investing Activity = Property, Plant, or Equipment Ending Balance Property, Plant, or Equipment Beginning Balance Cash Portion of Purchase of Equipment = Equipment Ending Balance Equipment Beginning Balance Cash Portion of Purchase of Equipment = 400 300 = 100

10. Cash Provided By Investing Activities (6.4.3) Cash Provided By Investing Activities = + Cash Portion Cash Portion + Cash Portion Cash Portion + Cash Portion Cash Portion + Cash Portion Cash Portion + Cash Portion Cash Portion Cash Provided By Investing Activities = -100

of of of of of of of of of of

Sale of Property (Land) Purchase of Property (Land) Sale of Plant (Building) Purchase of Plant (Building) Sale of Equipment Purchase of Equipment Sale of Investments Purchase of Investments Principal on Loan Collections Principal on Loans to Others

11. Financing Cash Flows (6.5) Cash Financing Activity = Equity, Loan, or Bond Ending Balance Equity, Loan, or Bond Beginning Balance Issuance of Common Stock = Common Stock Ending Balance Common Stock Beginning Balance Issuance of Common Stock = 230 200 = 30 12. Change In Retained Earnings (6.2.19) Change In Retained Earnings = Retained Earnings Ending Balance Retained Earnings Beginning Balance Change In Retained Earnings = 290 215 = 75 13. Cash Dividends Paid (6.5.1) Cash Dividends Paid = Net Income [Change In Retained Earnings (6.2.19) + Change In Dividends Payable (6.2.20)] Cash Dividends Paid = 100 [75 + 0] = 25 14. Cash Provided By Financing Activities (6.5.2) Cash Provided By Financing Activities = + Issuance of Common Stock + Loans from a bank + Issuance of Bonds Repurchase of Common Stock (Retirement or Treasury) Principal Payments on loans to a bank Redemption of Bonds Cash Dividends Paid (6.5.1) Principal Portion of Capital Lease Payments

6.6. CASH FLOW CALCULATIONS: COMPREHENSIVE Cash Provided By Financing Activities = 30 25 = 5 15. Net Increase In Cash (6.5.3) Net Increase In Cash = + Cash Provided By Operating Activities (6.3.12) or (6.3.13) + Cash Provided By Investing Activities (6.4.3) + Cash Provided By Financing Activities (6.5.2) = Change In Cash (6.1) Net Increase In Cash = 150 100 + 5 = 55 16. Cash Provided By Operating Activities: Indirect Method (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) Change In Prepaid Rent (6.2.7) + Change In Salary/Wages Payable (6.2.14) + Depreciation Expense (6.3.11) = 100 25 -20 + -20 + 75 = 150

91

6.6

Cash Flow Calculations: Comprehensive


Comparative Balance Sheets (in millions) 20X5 20X6 Cash $20 $29 Accounts Receivable 30 32 Short-term Investments 0 12 Inventory 50 46 Prepaid Insurance 6 3 Land 60 80 Buildings and Equipment 75 81 Accumulated Depreciation (20) (16) Total Assets $221 $267 Accounts Payable Salaries Payable Income Tax Payable Notes Payable Bonds Payable Discount on Bonds Capital Stock Paid-in CapitalExcess of Par Retained Earnings Liabilities + Equity 20 1 8 0 50 (3) 100 20 25 $221 26 3 6 20 35 (1) 130 29 19 $267

Example 49, Comprehensive Example 20X6:

Income Statement 20X6 (in millions) Sales Revenue $100 Investment (Interest) Revenue $3 Gain on Sale of Land $8 Cost of Goods Sold (60) Salary Expense (13) Depreciation Expense (3) Bond Issue Expense (5) Insurance Expense (7) Loss on Sale of Equipment (2) Income Tax Expense (9) Net Income $12

Additional Information 1. A portion of company land, purchased in a previous year for $10 million, was sold for $18 million. 2. Equipment that originally cost $14 million, and which was one-half depreciated, was sold for $5 million cash. 3. The common shares of Mazuma Corporation were purchased for $12 million as a short-term investment. 4. Property was purchased for $30 million cash for use as a parking lot. 5. On December 30, 20X6, new equipment was acquired by issuing a 12%, ve-year, $20 million note payable to the seller. 6. On January 1, 20X6, $15 million of bonds were retired at maturity. 7. The increase in the common stock account is attributable to the issuance of a 10% stock dividend (1 million shares) and the subsequent sale of 2 million shares of common stock. The market price of the $10 par value common stock was $13 per share on the dates of both transactions.

92

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES 8. Cash dividends of $5 million were paid to shareholders.

Show Show Show Show Show

the the the the the

Cash Provided By Operating Activities: Direct Method. Cash Provided By Investing Activities. Cash Provided By Financing Activities. Net Increase In Cash. Cash Provided By Operating Activities: Indirect Method.

Solution 49: 1. Change In Cash (6.1) Change In Cash = Cash Ending Balance Cash Beginning Balance Change In Cash = 29 20 = 9 2. Change In Accounts Receivable (6.2.1) Change In Accounts Receivable = Accounts Receivable Ending Balance Accounts Receivable Beginning Balance Change In Accounts Receivable = 32 30 = 2 3. Cash Received From Customers (6.3.1) Cash Received From Customers = Sales Revenues Change In Accounts Receivable (6.2.1) + Change In Unearned Revenue (6.2.9) Cash Received From Customers = 100 2 + 0 = 98 4. Cash Received From Interest and Dividends (6.3.2) Cash Received From Interest and Dividends = [Interest Revenue Change In Interest Receivable (6.2.2)] + [Dividend Revenue Change In Dividends Receivable (6.2.3)] Cash Received From Interest and Dividends = [3 0] + [0 0] = 3 5. Change In Inventory (6.2.5) Change In Inventory = Inventory Ending Balance Inventory Beginning Balance Change In Inventory = 46 50 = -4 6. Change In Accounts Payable (6.2.13) Change In Accounts Payable = Accounts Payable Ending Balance Accounts Payable Beginning Balance Change In Accounts Payable = 26 20 = 6 7. Cash Paid To Suppliers (6.3.6) Cash Paid To Suppliers = Costs Of Goods Sold + Change In Inventory (6.2.5) Change In Accounts Payable (6.2.13) Cash Paid To Suppliers = 60 + -4 6 = 50 8. Change In Salary/Wages Payable (6.2.14) Change In Salary/Wages Payable = Salary/Wages Payable Ending Balance Salary/Wages Payable Beginning Balance Change In Salary/Wages Payable = 3 1 = 2 9. Cash Paid To Employees (6.3.3) Cash Paid To Employees = Salary Expense Change In Salary/Wages Payable (6.2.14) Cash Paid To Employees = 13 2 = 11 10. Change In Discount on Bonds (6.2.17) Change In Discount on Bonds = Discount on Bonds Ending Balance Discount on Bonds Beginning Balance Change In Discount on Bonds = 1 3 = -2

6.6. CASH FLOW CALCULATIONS: COMPREHENSIVE 11. Cash Paid For Interest (6.3.9) Cash Paid For Interest = + Interest Expense + Change In Discount On Bonds (6.2.17) Change In Interest Payable (6.2.16) Change In Premium On Bonds (6.2.18) Cash Paid For Interest = 5 + -2 0 0 = 3 12. Change In Prepaid Insurance (6.2.8) Change In Prepaid Insurance = Prepaid Insurance Ending Balance Prepaid Insurance Beginning Balance Change In Prepaid Insurance = 3 6 = -3 13. Cash Paid For Insurance (6.3.5) Cash Paid For Insurance = Insurance Expense + Change In Prepaid Insurance (6.2.8) Cash Paid For Insurance = 7 + -3 = 4 14. Change In Taxes Payable (6.2.15) Change In Taxes Payable = Taxes Payable Ending Balance Taxes Payable Beginning Balance Change In Taxes Payable = 6 8 = -2 15. Cash Paid For Taxes (6.3.8) Cash Paid For Taxes = + Taxes Expense Change In Taxes Payable (6.2.15) Change In Deferred Tax Liability (6.2.11) + Change In Deferred Tax Asset (6.2.12) Cash Paid For Taxes = 9 -2 0 + 0 = 11 16. Cash Provided By Operating Activities: Direct Method (6.3.12) Cash Provided By Operating Activities = + Cash Received From Customers (6.3.1) 98 + Cash Received From Interest and Dividends (6.3.2) 3 Cash Paid To Employees (6.3.3) 11 Cash Paid To Suppliers (6.3.6) 50 Cash Paid For Insurance (6.3.5) 4 Cash Paid For Interest (6.3.9) 3 Cash Paid For Taxes (6.3.8) 11 Cash Provided By Operating Activities = 22 17. Investing Cash Flows: Additional Information Provided (6.4.2): Equipment Sale Investing Cash Inow = [Cost Value Accumulated Depreciation] Loss on Sale Investing Cash Inow = Cash Portion Of Sale of Equipment = [14 7] 2 = 5 18. Cash Portion of Sale of Property (Land) Cash Portion of Sale of Property (Land) = 18 19. Cash Portion of Sale of Property (Land) Cash Portion of Sale of Property (Land) = 18 20. Cash Portion of Purchase of Investments: Mazuma Corporation Cash Portion of Purchase of Investments: Mazuma Corporation = 12 21. Cash Portion of Purchase of Property (Land) Cash Portion of Purchase of Property (Land) = 30 22. Cash Provided By Investing Activities (6.4.3) Cash Provided By Investing Activities = + Cash Portion Cash Portion + Cash Portion Cash Portion Cash Provided By Investing Activities = of of of of Sale of Property (Land) Purchase of Property (Land) Sale of Equipment Purchase of Investments 18 30 5 12 (19)

93

94 23. Redemption of Bonds Redemption of Bonds = 15 24. Issuance of Common Stock Issuance of Common Stock = 26 25. Cash Dividends Paid Cash Dividends Paid = 5

CHAPTER 6. STATEMENT OF CASH FLOWS EXAMPLES

26. Cash Provided By Financing Activities (6.5.2) Cash Provided By Financing Activities = + Issuance of Common Stock Redemption of Bonds Cash Dividends Paid (6.5.1) Cash Provided By Financing Activities = 27. Gain or (Loss) on PP&E Sale (6.3.10): Land Gain or (Loss) on PP&E Sale = Cash Received Book Value Gain or (Loss) on PP&E Sale = 18 10 = 8 28. Gain or (Loss) on PP&E Sale (6.3.10): Equipment Gain or (Loss) on PP&E Sale = Cash Received Book Value Gain or (Loss) on PP&E Sale = 5 (14 7) = -2

26 15 5 6

29. Net Increase In Cash (6.5.3) Net Increase In Cash = + Cash Provided By Operating Activities (6.3.12) or (6.3.13) 22 + Cash Provided By Investing Activities (6.4.3) (19) + Cash Provided By Financing Activities (6.5.2) 6 = Change In Cash (6.1) 9 30. Cash Provided By Operating Activities: Indirect Method (6.3.13) Cash Provided By Operating Activities = Net Income Change In Accounts Receivable (6.2.1) Change In Inventory (6.2.5) Change In Prepaid Insurance (6.2.8) Gain on PP&E Sale (Land) (6.3.10) + Change In Accounts Payable (6.2.13) + Change In Salary/Wages Payable (6.2.14) + (Loss) on PP&E Sale (Equipment) (6.3.10) + Depreciation Expense (6.3.11) + Change In Discount On Bonds (6.2.17) + Change In Taxes Payable (6.2.15) Cash Provided By Operating Activities = 12 2 -4 -3 8 6 2 2 3 -2 -2 22

Chapter 7

Investments and Bonds Examples


7.1 Stock Fair Value Method SAS: Simple

Example 50 The 12/31/X5 balance sheet of a rm reported investments in SAS at $40,000 and related fair value adjustment of $2,000 dr. A year later, at 12/31/X6, the market value of the SAS portfolio was $37,000. There were no purchases or sales of investments during 20X6. Record the 20X6 AJE required under the fair value method. Solution 50: 1. Ledger SAS 12/31/X5 40,000 12/31/X5 2,000 balance 42,000 2. Stock Securities Available For Sale Adjustment (7.4.8) Securities Available For Sale Adjustment = Fair Valuesecurity Securities Available For Salesecurity (7.4.1) Balance Securities Available For Sale Adjustment = 37,000 42,000 = -5,000 Since Stock Securities Available For Sale Adjustment < 0 then: Debit 12/31/XX Unrealized Holding Gain/LossEquitysecurity (7.4.2) (7.4.8) Securities Available For Salesecurity (7.4.1) Debit Credit 12/31/X6 Unrealized Holding Gain/LossEquity SAS 5,000 SAS 5,000 Ledger SAS 12/31/X5 40,000 12/31/X5 2,000 12/31/X6 5,000 balance 37,000

Credit (7.4.8)

7.2

Stock Fair Value Method SAS: Comprehensive

Example 51 Purchased Red, Corp. on 9/1/X7 = 57,000. Purchased Orange, Corp. on 9/1/X7 = 76,000. Fair value of Red, Corp. on 12/31/X7 = 55,000. Fair value of Orange, Corp. on 12/31/X7 = 88,000. Fair value of Red, Corp. on 12/31/X8 = 65,000. Fair value of Orange, Corp. on 12/31/X8 = 86,000. 95

96 Sold Red, Corp. on 3/1/X9 = 56,500. Sold Orange, Corp. on 3/1/X9 = 86,000. Prepare all of the journal entries for these transactions. Solution 51:

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES

1. Stock Securities Available For Sale: Purchase (7.4.4) XX/XX/XX Debit Securities Available For Salesecurity (7.4.1) Stock Cost (7.2.1) Cash Debit Credit Securities Available For Sale: Red, Corp. 57,000 Cash 57,000 Debit Credit Securities Available For Sale: Orange, Corp. 76,000 Cash 76,000 Credit Stock Cost (7.2.1)

09/01/X7

09/01/X7 Ledgers

Securities Available For Sale: Red, Corp. 9/1/X7 57,000 (7.4.4) balance 57,000 Securities Available For Sale: Orange, Corp. 9/1/X7 20 (7.4.4) balance 76,000 2. Stock Securities Available For Sale Adjustment (7.4.8): Red, Corp. Securities Available For Sale Adjustment = Fair Valuesecurity Securities Available For Salesecurity (7.4.1) Balance Securities Available For Sale Adjustment = 55,000 57,000 = -2,000 Since Stock Securities Available For Sale Adjustment < 0 then: Debit Credit 12/31/XX Unrealized Holding Gain/LossEquitysecurity (7.4.2) (7.4.8) Securities Available For Salesecurity (7.4.1) (7.4.8) Debit Credit 12/31/X7 Unrealized Holding Gain/LossEquity: Red, Corp. 2,000 Securities Available For Sale: Red, Corp. 2,000 Ledgers Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.8) balance 2,000 Securities Available For Sale: Red, Corp. 9/1/X7 57,000 (7.4.4) 12/31/X7 2,000 (7.4.8) balance 55,000 3. Stock Securities Available For Sale Adjustment (7.4.8): Orange, Corp. Securities Available For Sale Adjustment = Fair Valuesecurity Securities Available For Salesecurity (7.4.1) Balance Securities Available For Sale Adjustment = 88,000 76,000 = 12,000 Since Stock Securities Available For Sale Adjustment > 0 then: Debit Credit 12/31/XX Securities Available For Salesecurity (7.4.1) (7.4.8) Unrealized Holding Gain/LossEquitysecurity (7.4.2) (7.4.8) Debit Credit 12/31/X7 Securities Available For Sale: Orange, Corp. 12,000 Unrealized Holding Gain/LossEquity: Orange, Corp. 12,000

7.2. STOCK FAIR VALUE METHOD SAS: COMPREHENSIVE Ledgers Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.8) balance 12,000 Securities Available For Sale: Orange, Corp. 9/1/X7 76,000 (7.4.4) 12/31/X7 12,000 (7.4.8) balance 88,000 Now print the Income Statement. 4. Stock Securities Available For Sale Closing Entries (7.4.10): Red, Corp. Since Unrealized Holding Gain/LossEquitysecurity has a loss: 12/31/XX Debit Accumulated Unrealized Holding Gain/LossEquitysecurity (7.4.2) Balance Unrealized Holding Gain/LossEquitysecurity Debit Credit Accumulated Unrealized Holding Gain/LossRed, Corp. 2,000 Unrealized Holding Gain/LossRed, Corp. 2,000 Credit (7.4.2) Balance

97

12/31/X7

Ledgers Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.8) 12/31/X7 2,000 (7.4.10) balance 0 Accumulated Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.10) balance 2,000 5. Stock Securities Available For Sale Closing Entries (7.4.10): Orange, Corp. Since Unrealized Holding Gain/LossEquitysecurity has a gain: 12/31/XX Unrealized Holding Gain/LossEquitysecurity Accumulated Unrealized Holding Gain/LossEquitysecurity Unrealized Holding Gain/LossOrange, Corp. Accumulated Unrealized Holding Gain/LossOrange, Corp. Debit (7.4.2) Balance Debit 12,000 Credit 12,000 Credit (7.4.2) Balance

12/31/X7

Ledgers Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.8) 12/31/X7 12,000 (7.4.10) balance 0 Accumulated Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.10) balance 12,000 Now print the Balance Sheet. 6. Stock Securities Available For Sale Adjustment (7.4.8): Red, Corp. Securities Available For Sale Adjustment = Fair Valuesecurity Securities Available For Salesecurity (7.4.1) Balance Securities Available For Sale Adjustment = 65,000 55,000 = 10,000 Since Stock Securities Available For Sale Adjustment > 0 then: Debit Credit 12/31/XX Securities Available For Salesecurity (7.4.1) (7.4.8) Unrealized Holding Gain/LossEquitysecurity (7.4.2) (7.4.8) Debit Credit 12/31/X8 Securities Available For Sale: Red, Corp. 10,000 Unrealized Holding Gain/LossEquity: Red, Corp. 10,000

98

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES Ledgers Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.8) 12/31/X7 2,000 (7.4.10) 12/31/X8 10,000 (7.4.8) balance 10,000 Securities Available For Sale: Red, Corp. 9/1/X7 57,000 (7.4.4) 12/31/X7 2,000 (7.4.8) 12/31/X8 10,000 (7.4.8) balance 65,000 7. Stock Securities Available For Sale Adjustment (7.4.8): Orange, Corp. Securities Available For Sale Adjustment = Fair Valuesecurity Securities Available For Salesecurity (7.4.1) Balance Securities Available For Sale Adjustment = 86,000 88,000 = -2,000 Since Stock Securities Available For Sale Adjustment < 0 then: Debit 12/31/XX Unrealized Holding Gain/LossEquitysecurity (7.4.2) (7.4.8) Securities Available For Salesecurity (7.4.1) Debit 12/31/X8 Unrealized Holding Gain/LossEquity: Orange, Corp. 2,000 Securities Available For Sale: Orange, Corp. Ledgers Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.8) 12/31/X7 12,000 (7.4.10) 12/31/X8 2,000 (7.4.8) balance 2,000 Securities Available For Sale: Orange, Corp. 9/1/X7 76,000 (7.4.4) 12/31/X7 12,000 (7.4.8) 12/31/X8 2,000 (7.4.8) balance 86,000 Now print the Income Statement. 8. Stock Securities Available For Sale Closing Entries (7.4.10): Red, Corp. Since Unrealized Holding Gain/LossEquitysecurity has a gain: 12/31/XX Unrealized Holding Gain/LossEquitysecurity Accumulated Unrealized Holding Gain/LossEquitysecurity Unrealized Holding Gain/LossRed, Corp. Accumulated Unrealized Holding Gain/LossRed, Corp. Debit (7.4.2) Balance Credit 10,000 Credit (7.4.2) Balance

Credit (7.4.8) Credit 2,000

12/31/X8

Debit 10,000

Ledgers Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.8) 12/31/X7 2,000 (7.4.10) 12/31/X8 10,000 (7.4.8) 12/31/X8 10,000 (7.4.10) balance 0 Accumulated Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.10) 12/31/X8 10,000 (7.4.10) balance 8,000 9. Stock Securities Available For Sale Closing Entries (7.4.10): Orange, Corp.

7.2. STOCK FAIR VALUE METHOD SAS: COMPREHENSIVE Since Unrealized Holding Gain/LossEquitysecurity has a loss: 12/31/XX Accumulated Unrealized Holding Gain/LossEquitysecurity Unrealized Holding Gain/LossEquitysecurity Accumulated Unrealized Holding Gain/LossOrange, Corp. Unrealized Holding Gain/LossOrange, Corp. Debit (7.4.2) Balance Debit 2,000 Credit 2,000 Credit (7.4.2) Balance

99

12/31/X8

Ledgers Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.8) 12/31/X7 12,000 (7.4.10) 12/31/X8 2,000 (7.4.8) 12/31/X8 2,000 (7.4.10) balance 0 Accumulated Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.10) 12/31/X8 2,000 (7.4.10) balance 10,000 Now print the Balance Sheet. 10. Stock Securities Available For Sale: Gain or (Loss) on Sale (7.4.9): Red, Corp. Gain or (Loss) on Sale = Proceeds Securities Available For Salesecurity Opening Balance (7.4.4) Gain or (Loss) on Sale = 56,500 57,000 = -500 Since Gain or (Loss) on Sale < 0 and Accumulated Unrealized Holding Gain/LossEquitysecurity has a gain: Debit Credit XX/XX/XX Cash Proceeds Loss On Sale of Securities (7.4.9) Accumulated Unrealized Holding Gain/LossEquitysecurity (7.4.3) Balance Securities Available For Salesecurity (7.4.1) Debit Credit 03/01/X9 Cash 56,500 Loss On Sale of Securities 500 Accumulated Unrealized Holding Gain/LossEquity: Red, Corp. 8,000 Securities Available For Sale: Red, Corp. 65,000 Ledgers Accumulated Unrealized Holding Gain/LossEquity: Red, Corp. 12/31/X7 2,000 (7.4.10) 12/31/X8 10,000 (7.4.10) 3/1/98 8,000 (7.4.9) balance 0 Securities Available For Sale: Red, Corp. 9/1/X7 57,000 (7.4.4) 12/31/X7 2,000 (7.4.8) 12/31/X8 10,000 (7.4.8) 3/1/X9 65,000 (7.4.9) balance 0 11. Stock Securities Available For Sale: Gain or (Loss) on Sale (7.4.9): Orange, Corp. Gain or (Loss) on Sale = Proceeds Securities Available For Salesecurity Opening Balance (7.4.4) Gain or (Loss) on Sale = 86,000 76,000 = 10,000 Since Gain or (Loss) on Sale > 0 and Accumulated Unrealized Holding Gain/LossEquitysecurity has a gain:

100

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES Debit Proceeds (7.4.3) Balance Credit

XX/XX/XX

Cash Accumulated Unrealized Holding Gain/LossEquitysecurity Gain On Sale of Securities Securities Available For Salesecurity

03/01/X9

Cash Accumulated Unrealized Holding Gain/LossEquity: Orange, Corp. Gain On Sale of Securities Securities Available For Sale: Orange, Corp.

Debit 86,000 10,000

(7.4.9) (7.4.1) Balance Credit

10,000 86,000

Ledgers Accumulated Unrealized Holding Gain/LossEquity: Orange, Corp. 12/31/X7 12,000 (7.4.10) 12/31/X8 2,000 (7.4.10) 3/1/X9 10,000 (7.4.9) balance 0 Securities Available For Sale: Orange, Corp. 9/1/X7 76,000 (7.4.4) 12/31/X7 12,000 (7.4.8) 12/31/X8 2,000 (7.4.8) 3/1/X9 86,000 (7.4.9) balance 0

7.3

Equity Method

Example 52, 20X8 Purchased 20% of Small, Corp. on 1/2/20X8 = 300,000. Small, Corp. Inventory Book Value = 400,000. Small, Corp. Inventory Fair Value = 405,000. Small, Corp. sold all of this inventory during 20X8. Small, Corp. Property, Plant, and Equipment Book Value = 500,000. Small, Corp. Property, Plant, and Equipment Fair Value = 700,000. Small, Corp. PP&E Estimated Average Remaining Useful Life = 10 years. Small, Corp. 20X8 Income Before Extraordinary Items = 80,000. Small, Corp. 20X8 Extraordinary Gain = 30,000. Small, Corp. 20X8 Cash Dividend = 50,000. Prepare all of the journal entries for 20X8. Solution 52: 1. Equity Investment: Purchase Journal Entry (7.6.3) Debit Credit XX/XX/XX Equity Investmentsecurity (7.6.1) (7.2.1) Cash (7.2.1) Debit Credit 01/02/X8 Equity Investment: Small, Corp 300,000 Cash 300,000 Ledger Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) balance 300,000 2. Equity Investment: Percentage of Year Held (7.6.5) Since Current Year = Year Of Purchase then: Months Remaining In Year Percentage of Year Held = 12 12 = 1.0 Percentage of Year Held = 12 3. Equity Investment: Income Before Extraordinary Items Realization Amount (7.6.8)

7.3. EQUITY METHOD Income Before Extraordinary Items Realization Amount = Acquirees Income Before Extraordinary Items Ownership Percentage (7.6.2) Percentage of Year Held (7.6.5) Income Before Extraordinary Items Realization Amount = 80,000 0.20 1.0 = 16,000 Journal Entry Debit Credit 12/31/XX Equity Investmentsecurity (7.6.1) (7.6.8) Equity Investment Revenue (7.2.4) (7.6.8) Debit Credit 12/31/X8 Equity Investment: Small, Corp 16,000 Equity Investment Revenue 16,000 Ledgers Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) 12/31/X8 16,000 (7.6.8) balance 316,000 Equity Investment Revenue 12/31/X8 16,000 (7.6.8) balance 16,000

101

4. Extraordinary Items Realization Amount (7.6.9) Extraordinary Items Realization Amount = Acquirees Extraordinary Items Ownership Percentage (7.6.2) Extraordinary Items Realization Amount = 30,000 0.20 1.0 = 6,000 Journal Entry, Since Extraordinary Items Realization Amount > 0 then: Debit Credit 12/31/XX Equity Investmentsecurity (7.6.1) (7.6.9) Extraordinary Gain (7.6.9) Debit Credit 12/31/X8 Equity Investment: Small, Corp. 6,000 Extraordinary Gain 6,000 Ledgers Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) 12/31/X8 16,000 (7.6.8) 12/31/X8 6,000 (7.6.9) balance 322,000 Extraordinary Gain 12/31/X8 6,000 (7.6.9) balance 6,000

5. Equity Investment: Majority Dividend Realization Amount (7.6.11) Majority Dividend Realization Amount = Acquirees Dividends Declared Ownership Percentage (7.6.2) Dividend Realization Amount = 50,000 0.20 = 10,000 Journal Entry Debit Credit 12/31/XX Cash or Dividends Receivable (7.6.11) Equity Investmentsecurity (7.6.1) (7.6.11) Debit Credit 12/31/X8 Cash 10,000 Equity Investment: Small, Corp. 10,000 Ledger

102

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) 12/31/X8 16,000 (7.6.8) 12/31/X8 6,000 (7.6.9) 12/31/X8 10,000 (7.6.11) balance 312,000

6. Depreciatable Assets Premium (7.6.12) Depreciatable Assets Premium = Acquirees Depreciatable Assets Fair Value Acquirees Depreciatable Assets Book Value Depreciatable Assets Premium = 700,000 500,000 = 200,000 7. Equity Investment: Depreciation Realization Amount (7.6.13) Since Depreciatable Assets Premium (7.6.12) > 0 then: Depreciatable Assets Premium (7.6.12)Ownership Percentage (7.6.2) Depreciation Realization Amount = Estimated Average Useful Years Percentage of Year Held (7.6.5) 200,0000.20 1.0 = 4,000 Depreciation Realization Amount = 10 Journal Entry Debit Credit 12/31/XX Equity Investment Revenue (7.2.4) (7.6.13) Equity Investmentsecurity (7.6.1) (7.6.13) Debit Credit 12/31/X8 Equity Investment Revenue 4,000 Equity Investment: Small, Corp. 4,000 Ledgers Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) 12/31/X8 16,000 (7.6.8) 12/31/X8 6,000 (7.6.9) 12/31/X8 10,000 (7.6.11) 12/31/X8 4,000 (7.6.13) balance 308,000 Equity Investment Revenue 12/31/X8 16,000 (7.6.8) 12/31/X8 4,000 (7.6.13) balance 12,000 8. Equity Investment: Inventory Premium (7.6.18) Inventory Premium = Acquirees Inventory Fair Value Acquirees Inventory Book Value Inventory Premium = 405,000 400,000 = 5,000 9. Equity Investment: Inventory Realization Amount (7.6.19) Since Inventory Premium (7.6.18) > 0 then: Inventory Realization Amount = Inventory Premium (7.6.18) Ownership Percentage (7.6.2) Percentage of Original Inventory Sold During Year Inventory Realization Amount = 5,000 0.20 1.0 = 1,000 Journal Entry Debit Credit 12/31/XX Equity Investment Revenue (7.2.4) (7.6.19) Equity Investmentsecurity (7.6.1) (7.6.19) Debit Credit 12/31/X8 Equity Investment Revenue 1,000 Equity Investment: Small, Corp. 1,000 Ledgers

7.4. BOND HELD TO MATURITY: AMORTIZED METHOD Equity Investment: Small, Corp. 1/2/X8 300,000 (7.2.1) 12/31/X8 16,000 (7.6.8) 12/31/X8 6,000 (7.6.9) 12/31/X8 10,000 (7.6.11) 12/31/X8 4,000 (7.6.13) 12/31/X8 1,000 (7.6.19) balance 307,000 Equity Investment Revenue 12/31/X8 16,000 (7.6.8) 12/31/X8 4,000 (7.6.13) 12/31/X8 1,000 (7.6.19) balance 11,000

103

7.4

Bond Held To Maturity: Amortized Method

Example 53 Purchase cost = $92,278. Face Value = $100,000. Coupon rate = 8%. Eective rate = 10%. Purchase date = 4/1/2X08. Maturity date = 3/31/2X13. Interest payment dates = 9/30 and 3/31. The rm is willing and able to hold the bond until maturity. What What What What What is is is is is the the the the the purchase journal entry? rst interest journal entry? end-of-year adjusting journal entry? second interest journal entry? retirement journal entry?

Solution 53: 1. Semi-Annual Coupon Amount Per Bond (7.7.4) Coupon Rate Semi-Annual Coupon Amount Per bond = $1,000 2 Semi-Annual Coupon Amount Per bond = $1,000 0.08 = 40 2 2. Semi-Annual Interest Receivable Amount (7.7.7) Semi-Annual Interest Receivable Amount = Semi-Annual Coupon Amount Per Bond (7.7.4) Bond Purchase Quantity Semi-Annual Interest Receivable Amount = 40 100 = 4,000 3. Bond Premium/(Discount) Amount (7.7.9) Bond Premium/(Discount) Amount = Bond Purchase Cost (7.7.1) Bond Redemption Amount (7.7.3) Bond Premium/(Discount) Amount = 92,278 100,000 = -7,722 4. Bond Held To Maturity: Purchase (7.8.2) XX/XX/XXXX Bond Held To Maturitysecurity (7.8.1) Cash Debit Credit Bond Held To Maturity 92,278 Cash 92,278 Bond Held To Maturity 04/01/2X08 92,278 balance 92,278 Debit Bond Purchase Cost (7.7.1) Credit (7.7.1)

04/01/2X08 Ledger

104

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES

5. Bond Interest Receivable Amount (7.7.10) 09/30/2X08 Since this is the rst interest payment received then: Interest Receivable Amount = Semi-Annual Interest Receivable Amount (7.7.7) Interest Receivable Amount = 4,000 6. Bond Interest Revenue Amount (7.7.11) Since this is the rst interest payment received then: Interest Revenue Amount = Bondsecurity (7.8.1) Debit Balance 6 Eective Interest Rate (7.7.6) 12 6 Interest Revenue Amount = 92,278 0.10 12 = 4,614 7. Bond Amortization Amount (7.7.12) Since Premium/(Discount) (7.7.9) < 0 then: Bond Amortization Amount = Bond Interest Revenue Amount (7.7.11) Bond Interest Receivable (7.7.10) Bond Amortization Amount = 4,614 4,000 = 614 8. Bond Held To Maturity: Interest and Amortization Journal Entry (7.8.3) Since Premium/(Discount) (7.7.9) < 0 Debit Credit XX/XX/XXXX Interest Receivable Receivable (7.7.10) Bond Held To Maturitysecurity (7.8.1) Amortization (7.7.12) Interest Revenue Revenue (7.7.11) Debit Credit 09/30/2X08 Interest Receivable 4,000 Bond Held To Maturity 614 Interest Revenue 4,614 Ledger Bond Held To Maturity 04/01/2X08 92,278 09/30/2X08 614 balance 92,892 9. Interest Cash Received (7.8.4) XX/XX/XXXX Debit Cash Semi-Annual Interest Receivable Amount (7.7.7) Interest Receivable Debit Credit Cash 4,000 Interest Receivable 4,000 Credit (7.7.7)

09/30/2X08

10. Bond Interest Receivable Amount (7.7.10) 12/31/20X8 Since Current Date = December 31 and December 31 is not an interest date then: Interest Receivable Amount = Semi-Annual Interest Receivable Amount (7.7.7) Number of Months Since Last Interest Payment 6 Interest Receivable Amount = 4,000 3 = 2,000 6 11. Bond Interest Revenue Amount (7.7.11) Since Current Date = December 31 and December 31 is not an interest date then: Interest Revenue Amount = Bondsecurity (7.8.1) Debit Balance Eective Interest Rate (7.7.6) Number of Months Since Last Interest Payment 12 3 Interest Revenue Amount = 92,892 0.10 12 = 2,322 12. Bond Amortization Amount (7.7.12) Since Premium/(Discount) (7.7.9) < 0 then: Bond Amortization Amount = Bond Interest Revenue Amount (7.7.11) Bond Interest Receivable (7.7.10) Bond Amortization Amount = 2,322 2,000 = 322

7.4. BOND HELD TO MATURITY: AMORTIZED METHOD 13. Bond Held To Maturity: Interest and Amortization Journal Entry (7.8.3) Since Premium/(Discount) (7.7.9) < 0 Debit Credit XX/XX/XXXX Interest Receivable Receivable (7.7.10) Bond Held To Maturitysecurity (7.8.1) Amortization (7.7.12) Interest Revenue Revenue (7.7.11) Debit Credit 12/31/2X08 Interest Receivable 2,000 Bond Held To Maturity 322 Interest Revenue 2,322 Ledger Bond Held To Maturity 04/01/2X08 92,278 09/30/2X08 614 12/31/2X08 322 balance 93,214 14. Bond Interest Receivable Amount (7.7.10) 03/31/2X09 Since Interest Date < July 1 and this is not the rst interest payment received then: Interest Receivable Amount = Semi-Annual Interest Receivable Amount (7.7.7) 6 Number of Months Last Year Since Interest Payment 6 3 = 2,000 Interest Receivable Amount = 4,000 6 6 15. Bond Interest Revenue Amount (7.7.11) Since Interest Date < July 1 and this is not the rst interest payment received then: Interest Revenue Amount = Bondsecurity (7.8.1) Debit Balance Eective Interest Rate (7.7.6) 6 Number of Months Last Year Since Interest Payment 12 3 = 2,330 Interest Revenue Amount = 93,214 0.10 6 12 16. Bond Amortization Amount (7.7.12) Since Premium/(Discount) (7.7.9) < 0 then: Bond Amortization Amount = Bond Interest Revenue Amount (7.7.11) Bond Interest Receivable (7.7.10) Bond Amortization Amount = 2,330 2,000 = 330 17. Bond Held To Maturity: Interest and Amortization Journal Entry (7.8.3) Since Premium/(Discount) (7.7.9) < 0 Debit Credit XX/XX/XXXX Interest Receivable Receivable (7.7.10) Bond Held To Maturitysecurity (7.8.1) Amortization (7.7.12) Interest Revenue Revenue (7.7.11) Debit Credit 03/31/2X09 Interest Receivable 2,000 Bond Held To Maturity 330 Interest Revenue 2,330 Ledger Bond Held To Maturity 04/01/2X08 92,278 09/30/2X08 614 12/31/2X08 322 03/31/2X09 330 balance 93,544 18. Interest Cash Received (7.8.4) XX/XX/XXXX Cash Interest Receivable Debit Semi-Annual Interest Receivable Amount (7.7.7) Credit (7.7.7)

105

106 Debit 4,000 Credit 4,000

CHAPTER 7. INVESTMENTS AND BONDS EXAMPLES

03/31/2X09

Cash Interest Receivable

19. Bond Held To Maturity: Redemption (7.8.5) XX/XX/XXXX Debit Cash (7.7.3) Bond Held To Maturitysecurity (7.8.1) Debit Credit Cash 100,000 Bond Held To Maturity 100,000 Credit (7.7.3)

03/31/2X13

Chapter 8

Consolidation Method Examples


8.1 Business Combinations: Statutory Merger

Example 54 Acquiree Capitalization = $5,000,000. Acquirer Capitalization = $45,000,000. Acquirer Common Shares Outstanding = 900,000. How many acquirers shares are issued to the acquirees stockholders? Solution 54: 1. Statutory Merger Shares to Issue (8.1.4) Acquiree Market Capitalization Acquiree Market Capitalization + Acquirer Market Capitalization Acquiree Ownership Percent Acquirer Common Shares Outstanding Acquiree Common Shares Received = 1 - Acquiree Ownership Percent 5,000,000 Acquiree Ownership Percent = 5,000,000 + 45,000,000 = 0.10 0.10 900,000 Acquiree Common Shares Received = = 100,000 1 - 0.10 Acquiree Ownership Percent =

8.2

Business Combinations: Statutory Consolidation

Example 55 Acquirer Capitalization = $45,000,000. Acquiree Capitalization = $5,000,000. Consolidated Shares Issued = 2,000,000. How many shares are issued to the acquirers stockholders? How many shares are issued to the acquirees stockholders? Solution 55: 1. Per Share Market Value of Consolidated (8.1.6) Acquiree Market Capitalization + Acquirer Market Capitalization Per Share Market Value of Consolidated = Consolidated Shares Issued 5,000,000 + 45,000,000 Per Share Market Value of Consolidated = = 25.00 2,000,000 2. Acquiree Consolidated Shared (8.1.7) Acquiree Market Capitalization Acquiree Consolidated Shares = Per Share Market Value of Consolidated (8.1.6) 5,000,000 Acquiree Consolidated Shares = 25.00 = 200,000 3. Acquirer Consolidated Shared (8.1.8) Acquirer Market Capitalization Acquirer Consolidated Shares = Per Share Market Value of Consolidated (8.1.6) 45,000,000 Acquirer Consolidated Shares = = 1,800,000 25.00 107

108

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

8.3

Contingent Consideration: Net Income

Example 56 Contingent Consideration is a range of the acquirers stock consideration depending upon a uctuation of either the acquirees net income or the acquirers stock price. If the acquirees net income exceeds a threshold, then the Exchange Ratio increases from 2.0 to 3.0. Agreed upon exchange ratio = 2.0. Contingent exchange ratio = 3.0. Acquirers current price per share = $15.00. Acquirees shares outstanding = 100,000. What is the purchase price if the earnings threshold is not met? What is the purchase price if the earnings threshold is met? Solution 56: 1. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Stock Consideration Shares Acquirer Issues = 100,000 2.0 = 200,000 2. Stock Consideration Stock Cost (8.1.12) Stock Consideration Stock Cost = Stock Consideration Shares Acquirer Issues (8.1.11) Per Share Market Value of Acquirer Stock Consideration Stock Cost if no threshold = 200,000 15 = $3,000,000 3. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Stock Consideration Shares Acquirer Issues = 100,000 3.0 = 300,000 4. Stock Consideration Stock Cost (8.1.12) Stock Consideration Stock Cost = Stock Consideration Shares Acquirer Issues (8.1.11) Per Share Market Value of Acquirer Stock Consideration Stock Cost if threshold = 300,000 15 = $4,500,000

8.4

Contingent Consideration: Acquirers Stock Price

Example 57 Contingent Consideration is a range of the acquirers stock consideration depending upon a uctuation of either the acquirees net income or the acquirers stock price. If the acquirers stock prices drops to or below the threshold of $40, then the Exchange Ratio is recalculated. Purchase price = $10,000,000. Acquiree shares outstanding = 100,000. How many new shares to issue if the acquirers stock price is $50? How many new shares to issue if the acquirers stock price is $40? Solution 57: 1. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) AND Stock Consideration Stock Cost (8.1.12) Stock Consideration Stock Cost = Stock Consideration Shares Acquirer Issues (8.1.11) Per Share Market Value of Acquirer

8.5. CONSOLIDATION METHOD: NO PREACQUISITION EARNINGS Stock Consideration Stock Cost = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Per Share Market Value of Acquirer Stock Cost (7.2.1) Exchange Ratio (8.1.10) = Acquiree Shares Outstanding Per Share Market Value of Acquirer 10,000,000 Exchange Ratio = 100,000 50 = 2.0 2. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Shares Acquirer Issues if threshold is not met = 100,000 2.0 = 200,000 3. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) AND Stock Consideration Stock Cost (8.1.12) Stock Consideration Stock Cost = Stock Consideration Shares Acquirer Issues (8.1.11) Per Share Market Value of Acquirer Stock Consideration Stock Cost = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Per Share Market Value of Acquirer Stock Cost (7.2.1) Exchange Ratio (8.1.10) = Acquiree Shares Outstanding Per Share Market Value of Acquirer 10,000,000 Exchange Ratio = 100,000 40 = 2.5 4. Stock Consideration Shares Acquirer Issues (8.1.11) Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding Exchange Ratio (8.1.10) Shares Acquirer Issues if threshold is met = 100,000 2.5 = 250,000 Notice that 50,000 additional shares needs to be issued because the stock price dropped from $50 to $40.

109

8.5

Consolidation Method: No Preacquisition Earnings

Example 58 Hoosier Engine (acquirer) purchased Michigan Automotive (acquiree) on 1/1/X5 for $750,000. Hoosier Engines consideration was 11,000 common stock shares at $5.00 par. Hoosier acquired 60% of Michigans outstanding common stock. Immediately prior to acquisition: Account Hoosier Book Value Michigan Book Value Michigan Market Value Cash and Receivables 920,000 75,700 85,000 Inventory 2,918,000 213,000 245,000 Land 742,000 165,600 195,000 2,826,000 793,000 975,000 Plant Assets (net) Other Non-Current Assets 760,000 46,400 55,000 Current Liabilities 1,850,000 175,000 175,000 3,270,000 300,000 280,000 Long-Term Debt Common Stock 91,000 59,800 Additional Paid-In Capital 800,000 200,000 Retained Earnings 2,155,000 558,900 Prepare the purchase journal entry on 1/1/X5. Prepare the elimination journal entry on 1/1/X5. Prepare the consolidation trial balance on 1/1/X5. Solution 58: 1. Acquiree Equity (8.2.7)

110

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Acquiree Equity = + Common Stock at Par + Additional Paid-In Capital + Retained Earnings + Preacquisition Earnings Amount (8.2.6) Dividends Acquiree Equity = 59,800 + 200,000 + 558,900 + 0 0 = 818,700

2. Imputed Market Value (8.2.1) Stock Cost (7.2.1) Imputed Market Value = Ownerhip Percentage (7.6.2) 750,000 Imputed Market Value = 0.60 = 1,250,000 3. Non-Controlling Interest Amount (8.2.3) Non-Controlling Interest Amount = Imputed Market Value (8.2.1) Stock Cost (7.2.1) Non-Controlling Interest Amount = 1,250,000 750,000 = 500,000 4. Purchase Dierential (8.2.8) Purchase Dierential = Imputed Market Value (8.2.1) Acquiree Equity (8.2.7) Purchase Dierential = 1,250,000 818,700 = 431,300 5. Total Fair/Book Dierence (8.2.9) Let m = the number of acquirees assets. Let n = the number of acquirees liabilities. m Total Fair/Book Dierence = i=1 (Fair Value Asseti Book Value Asseti ) n i=1 (Fair Value Liabilityi Book Value Liabilityi ) Total Fair/Book Dierence Table (8.2.10) Debit Account Asset1 Fair Value Asset1 Book Value Asset1 Asset2 Fair Value Asset2 Book Value Asset2 ... Assetm Fair Value Assetm Book Value Assetm Liability1 Liability2 ... Liabilityn Total Fair/Book Dierence (8.2.9) Credit

Fair Value Liability1 Book Value Liability1 Fair Value Liability2 Book Value Liability2 Fair Value Liabilityn Book Value Liabilityn

Note: if Fair Valuei Book Valuei < 0 then record the absolute value of the dierence in the opposite column. Account Cash and Receivables Inventory Land Plant Assets (net) Other Non-Current Assets Current Liabilities Long-Term Debt Total Fair/Book Dierence Debit 85,000 75,700 = 9,300 245,000 213,000 = 32,000 195,000 165,600 = 29,400 975,000 793,000 = 182,000 55,000 46,400 = 8,600 |280,000 300,000| = 20,000 281,300 Credit

175,000 175,000 = 0

6. Goodwill Amount (8.2.11) Goodwill Amount = Purchase Dierential (8.2.8) Total Fair/Book Dierence (8.2.9) Goodwill Amount = 431,300 281,300 = 150,000 7. Consolidation Purchase Journal Entry (8.2.14) Since Goodwill Amount (8.2.11) >= 0 then:

8.6. CONSOLIDATION METHOD: PREACQUISITION EARNINGS/100% ACQUISITION Debit Investment in Subsidiary (8.1.9) ( an Asset) Stock Cost (7.2.1) Cash and/or Stock and/or Debt Debit Credit Investment in Michigan Automotive 750,000 Common Stock (11,000 shares $5.00 par) 55,000 Additional Paid-In Capital 695,000 Credit Stock Cost (7.2.1)

111

XX/XX/XX

01/01/X5

8. Initial Purchase Elimination Journal Entry (8.2.15) To eliminate the permanent accounts: XX/XX/XX Debit Common Stock Subsidiary @ Purchase Date Additional Paid-In Capital Subsidiary @ Purchase Date Retained Earnings Subsidiary @ Purchase Date Goodwill ( an Asset Account) (8.2.11) if positive Preacquisition Earnings (8.2.6) Dividends ( a Contra-Equity Account) Investment in Subsidiarysecurity Non-Controlling Interest (8.2.2) Extraordinary Gain Total Fair Book Dierence Table (8.2.10) Debit Credit Common Stock 59,800 Additional Paid-In Capital 200,000 Retained Earnings 558,900 Goodwill 150,000 Investment in Michigan 750,000 Non-Controlling Interest 500,000 Cash and Receivables 9,300 Inventory 32,000 Land 29,400 Plant Assets (net) 182,000 Other Non-Current Assets 8,600 Long-Term Debt 20,000 1,250,000 1,250,000 Elimination Debit Credit 9.3 32.0 29.4 182.0 8.6 750.0 150.0 20.0 59.8 200.0 558.9 1,250.0 500.0 1,250.0 Credit

Subsidiary @ Purchase Date Beginning Balance (8.2.3) (8.2.13) if negative Goodwill

01/01/X5

9. Consolidation Trial Balance Table (8.2.17) in thousands. Hoosier Michigan Account Debit Credit Debit Credit Cash and Receivables 920.0 75.7 Inventory 2,918.0 213.0 Land 742.0 165.6 Plant Assets (net) 2,826.0 793.0 Other Non-Current Assets 760.0 46.4 Investment in Michigan 750,000 Goodwill Current Liabilities 1,850.0 175.0 Long-Term Debt 3,270.0 300.0 Common Stock 146.0 59.8 Additional Paid-In Capital 1,495.0 200.0 Retained Earnings 2,155.0 558.9 Non-Controlling Interest Total 8,916.0 8,916.0 1,293.7 1,293.7

Consolidation Debit Credit 1,005.0 3,163.0 937.0 3,801.0 815.0 0.0 150.0 2,025.0 3,550.0 146.0 1,495.0 2,155.0 500.0 9,871.0 9,871.0

8.6

Consolidation Method: Preacquisition Earnings/100% Acquisition

Example 59 School Supply (acquirer) purchased Midwestern Book (acquiree) on 2/1/X5 for $1,108,000. School Supplys consideration was 22,000 preferred stock shares at $20.00 par.

112

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

School Supply acquired 100% of Midwestern Books outstanding common stock. Immediately prior to acquisition: Account Schools Book Value Midwesterns Book Value Midwesterns Market Value Cash and Receivables 633,000 192,000 185,000 Inventory 2,501,000 414,000 410,000 854,000 71,000 80,000 Land Plant Assets (net) 3,985,000 936,000 950,000 213,000 58,000 45,000 Other Non-Current Assets Current Liabilities 1,600,000 223,000 223,000 1,250,000 340,000 339,000 Long-Term Debt Sales 1,150,000 226,000 Cost of Goods Sold 402,000 75,000 Depreciation Expense 56,000 10,000 Other Expenses 257,000 46,000 Common Stock 22,900 87,000 Additional Paid-In Capital 647,000 331,000 Retained Earnings 4,231,100 595,000 Prepare Prepare Prepare Prepare the the the the purchase journal entry on 2/1/X5. elimination journal entry on 2/1/X5. consolidation trial balance on 2/1/X5. Statement Trial Balance (5.18.5) from the consolidated trial balance.

Solution 59: 1. Preacquisition Earnings Amount (8.2.6) n Preacquisition Earnings Amount = + i=1 Acquiree n + i=1 Acquiree n i=1 Acquiree n i=1 Acquiree Preacquisition Earnings Amount = Revenuei Gaini Expensei Lossi 226,000 0 131,000 0 95,000

2. Acquiree Equity (8.2.7) Acquiree Equity = + Common Stock at Par + Additional Paid-In Capital + Retained Earnings + Preacquisition Earnings Amount (8.2.6) Dividends Acquiree Equity = 87,000 + 331,000 + 595,000 + 95,000 0 = 1,108,000 3. Imputed Market Value (8.2.1) Stock Cost (7.2.1) Imputed Market Value = Ownership Percentage (7.6.2) 1,108,000 Imputed Market Value = = 1,108,000 1.00 4. Non-Controlling Interest Amount (8.2.3) Non-Controlling Interest Amount = Imputed Market Value (8.2.1) Stock Cost (7.2.1) Non-Controlling Interest Amount = 1,108,000 1,108,000 = 0 5. Purchase Dierential (8.2.8) Purchase Dierential = Imputed Market Value (8.2.1) Acquiree Equity (8.2.7) Purchase Dierential = 1,108,000 1,188,000 = 0 6. Total Fair/Book Dierence (8.2.9) Let m = the number of acquirees assets. Let n = the number of acquirees liabilities. m Total Fair/Book Dierence = i=1 (Fair Value Asseti Book Value Asseti ) n i=1 (Fair Value Liabilityi Book Value Liabilityi ) Total Fair/Book Dierence Table (8.2.10)

8.6. CONSOLIDATION METHOD: PREACQUISITION EARNINGS/100% ACQUISITION Account Asset1 Asset2 ... Assetm Liability1 Liability2 ... Liabilityn Total Fair/Book Dierence Debit Fair Value Asset1 Book Value Asset1 Fair Value Asset2 Book Value Asset2 Fair Value Assetm Book Value Assetm

113 Credit

Fair Value Liability1 Book Value Liability1 Fair Value Liability2 Book Value Liability2 Fair Value Liabilityn Book Value Liabilityn (8.2.9)

Note: if Fair Valuei Book Valuei < 0 then record the absolute value of the dierence in the opposite column. Account Cash and Receivables Inventory Land Plant Assets (net) Other Non-Current Assets Current Liabilities Long-Term Debt Total Fair/Book Dierence Debit Credit |185,000 192,000| = 7,000 |410,000 414,000| = 4,000

80,000 71,600 = 9,000 950,000 936,000 = 14,000 |45,000 58,000| = 13,000 223,000 223,000 = 0 |339,000 340,000| = 1,000 0

7. Goodwill Amount (8.2.11) Goodwill Amount = Purchase Dierential (8.2.8) Total Fair/Book Dierence (8.2.9) Goodwill Amount = 0 0 = 0

8. Consolidation Purchase Journal Entry (8.2.14) Since Goodwill Amount (8.2.11) >= 0 then: XX/XX/XX Debit Investment in Subsidiary (8.1.9) ( an Asset) Stock Cost (7.2.1) Cash and/or Stock and/or Debt Debit Credit Investment in Midwestern Book 1,108,000 Preferred Stock (20,000 at $20) 440,000 Additional Paid-In Preferred 668,000 Credit Stock Cost (7.2.1)

02/01/X5

9. Initial Purchase Elimination Journal Entry (8.2.15) To eliminate the permanent accounts: XX/XX/XX Common Stock Additional Paid-In Capital Retained Earnings Goodwill ( an Asset Account) Preacquisition Earnings Dividends ( a Contra-Equity Account) Investment in Subsidiarysecurity Non-Controlling Interest (8.2.2) Extraordinary Gain Total Fair Book Dierence Table (8.2.10) Debit Subsidiary @ Purchase Date Subsidiary @ Purchase Date Subsidiary @ Purchase Date (8.2.11) if positive (8.2.6) Credit

Subsidiary @ Purchase Date Beginning Balance (8.2.3) (8.2.13) if negative Goodwill

114

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Debit 87,000 331,000 595,000 95,000 Credit

02/01/X5

Common Stock Additional Paid-In Capital Retained Earnings Preacquisition Earnings Investment in Midwestern Book Cash and Receivables Inventory Land Plant Assets (net) Other Non-Current Assets Long-Term Debt

1,108,000 7,000 4,000 9,000 14,000 13,000 1,000 1,132,000 1,132,000 Elimination Debit Credit Consolidation Debit Credit 1,376.0 477.0 66.0 303.0 95.0 818.0 2,911.0 934.0 4,935.0 258.0 0.0 1,823.0 1,589.0 22.9 647.0 440.0 668.0 4,231.1 10,797.0 10,797.0

10. Consolidation Trial Balance Table (8.2.17) in thousands. School Midwestern Account Debit Credit Debit Credit Sales 1,150.0 226.0 Cost of Goods Sold 402.0 75.0 Depreciation Expense 56.0 10.0 Other Expenses 257.0 46.0 Preacquisition Earnings Cash and Receivables 633.0 192.0 Inventory 2,501.0 414.0 Land 854.0 71.0 Plant Assets (net) 3,985.0 936.0 Other Non-Current Assets 213.0 58.0 Investment in Midwestern Book 1,108.0 Current Liabilities 1,600.0 223.0 Long-Term Debt 1,250.0 340.0 Common Stock 22.9 87.0 Additional Paid-In Capital 647.0 331.0 Preferred Stock 440.0 Additional Paid-In Preferred 668.0 Retained Earnings 4,231.1 595.0 Total 10,009.0 10,009.0 1,802.0 1,802.0 11. Pro-forma Net Income (5.18.1) n Pro-forma Net Income = + i=1 Net Revenuei Credit Balance n i=1 Expensei Debit Balance n + i=1 Gaini Credit Balance n i=1 Lossi Debit Balance Preacquisition Earnings (8.2.5) Debit Balance Debit Credit Statement Account Sales 1,376.0 Cost of Goods Sold 477.0 Depreciation Expenses 66.0 Other Expenses 303.0 Preacquisition Earnings 95.0 Pro-forma Net Income 435.0 (5.18.1) (1) 12. Book Value Equity (5.18.2) n Book Value Equity = i=1 Equityi Credit Balance Account Debit Credit Statement Common @ Par 22.9 Additional Paid-in Capital 647.0 Retained Earnings 4,231.1 Preferred Stock @ Par 440.0 Additional Paid-in Preferred 668.0 Book Value Equity 6,009.0 (5.18.2) (6)

95.0 7.0 4.0 9.0 14.0 13.0 1,108.0 1.0 87.0 331.0

595.0 1,132.0

1,132.0

8.6. CONSOLIDATION METHOD: PREACQUISITION EARNINGS/100% ACQUISITION 13. Current Equity (5.18.3) Current Equity = + Book Value Equity (5.18.2) + Pro-forma Net Income (5.18.1) Dividends Declared Debit Balance + Non-Controlling Interest (8.2.2) Current Equity =

115

6,009.0 435.0 0.0 0.0 6,444.0

14. Current Retained Earnings (5.18.4) Current Retained Earnings = + Pro-forma Net Income (5.18.1) + Retained Earnings Credit Balance Dividends Declared Debit Balance Current Retained Earnings =

435.0 4,231.1 0.0 4666.1

15. Statement Trial Balance (5.18.5) Template Debit Credit Account Net Revenue1 Amount1 ... Expense1 Amount1 ... Gain1 Amount1 ... Loss1 Amount1 ... Preacquisition Earnings (8.2.5) Amount Pro-forma Net Income Retained Earnings Dividends Declared Amount (3) Current Retained Earnings Net Asset1 Amount1 ... Total Assets Net Liability1 Amount1 ... Total Liabilities Equity1 Amount1 ... Book Value Equity Pro-form Net Income Dividends Declared Non-Controlling Interest (8.2.2) Amount (7) Current Equity

Statement

(5.18.1) (1) Credit Balance (2) (1) + (2) (3) = (5.18.4)


n i=1

Asseti (4)

n i=1

Liabilityi (5)

(5.18.2) (6) (5.18.1) (1) -Debit Balance (3) (6) + (1) (3) + (7) = (5.18.3) (4) = (5) + (5.18.3)

16. Statement Trial Balance (5.18.5) Presentation

116 Account Sales Cost of Goods Sold Depreciation Expenses Other Expenses Preacquisition Earnings Pro-forma Net Income Retained Earnings Current Retained Earnings Cash and Receivables Inventory Land Plant Assets (net) Other Non-current Assets Total Assets Current Liabilities Long-term Debt Total Liabilities Common @ Par Additional Paid-in Capital Preferred Stock @ Par Additional Paid-in Preferred Retained Earnings Book Value Equity Pro-form Net Income Current Equity Debit 477.0 66.0 303.0 95.0 Credit 1,376.0

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Statement

435.0 4,231.1 4,666.1 818.0 2,911.0 934.0 4,935.0 258.0 9,856.0 1,823.0 1,589.0 3,412.0 22.9 647.0 440.0 668.0 4,231.1 6,009.0 435.0 6,444.0 1,132.0 1,132.0

8.7

Consolidation Method: Preacquisition Earnings/75% Acquisition

Example 60 School Supply (acquirer) purchased Midwestern Book (acquiree) on 2/1/X5 for $831,000. School Supplys consideration was 16,500 preferred stock shares at $20.00 par. School Supply acquired 75% of Midwestern Books outstanding common stock. Immediately prior to acquisition: Account Schools Book Value Midwesterns Book Value Midwesterns Market Value Cash and Receivables 633,000 192,000 185,000 Inventory 2,501,000 414,000 410,000 Land 854,000 71,000 80,000 Plant Assets (net) 3,985,000 936,000 950,000 213,000 58,000 45,000 Other Non-Current Assets Current Liabilities 1,600,000 223,000 223,000 Long-Term Debt 1,250,000 340,000 339,000 Sales 1,150,000 226,000 Cost of Goods Sold 402,000 75,000 Depreciation Expense 56,000 10,000 Other Expenses 257,000 46,000 Common Stock 22,900 87,000 Additional Paid-In Capital 647,000 331,000 Retained Earnings 4,231,100 595,000 Prepare Prepare Prepare Prepare the the the the purchase journal entry on 2/1/X5. elimination journal entry on 2/1/X5. consolidation trial balance on 2/1/X5. Statement Trial Balance (5.18.5) from the consolidated trial balance.

Solution 60: 1. Preacquisition Earnings Amount (8.2.6)

8.7. CONSOLIDATION METHOD: PREACQUISITION EARNINGS/75% ACQUISITION Preacquisition Earnings Amount = + + Preacquisition Earnings Amount =
n i=1 n i=1 n i=1 n i=1

117

Acquiree Acquiree Acquiree Acquiree

Revenuei Gaini Expensei Lossi

226,000 0 131,000 0 95,000

2. Acquiree Equity (8.2.7) Acquiree Equity = + Common Stock at Par + Additional Paid-In Capital + Retained Earnings + Preacquisition Earnings Amount (8.2.6) Dividends Acquiree Equity = 87,000 + 331,000 + 595,000 + 95,000 0 = 1,108,000 3. Imputed Market Value (8.2.1) Stock Cost (7.2.1) Imputed Market Value = Ownership Percentage (7.6.2) 831,000 Imputed Market Value = 0.75 = 1,108,000 4. Non-Controlling Interest Amount (8.2.3) Non-Controlling Interest Amount = Imputed Market Value (8.2.1) Stock Cost (7.2.1) Non-Controlling Interest Amount = 1,108,000 831,000 = 277,000 5. Purchase Dierential (8.2.8) Purchase Dierential = Imputed Market Value (8.2.1) Acquiree Equity (8.2.7) Purchase Dierential = 1,108,000 1,108,000 = 0 6. Total Fair/Book Dierence (8.2.9) Let m = the number of acquirees assets. Let n = the number of acquirees liabilities. m Total Fair/Book Dierence = i=1 (Fair Value Asseti Book Value Asseti ) n i=1 (Fair Value Liabilityi Book Value Liabilityi ) Total Fair/Book Dierence Table (8.2.10) Account Debit Asset1 Fair Value Asset1 Book Value Asset1 Asset2 Fair Value Asset2 Book Value Asset2 ... Assetm Fair Value Assetm Book Value Assetm Liability1 Liability2 ... Liabilityn Total Fair/Book Dierence (8.2.9) Credit

Fair Value Liability1 Book Value Liability1 Fair Value Liability2 Book Value Liability2 Fair Value Liabilityn Book Value Liabilityn

Note: if Fair Valuei Book Valuei < 0 then record the absolute value of the dierence in the opposite column. Account Cash and Receivables Inventory Land Plant Assets (net) Other Non-Current Assets Current Liabilities Long-Term Debt Total Fair/Book Dierence Debit Credit |185,000 192,000| = 7,000 |410,000 414,000| = 4,000

80,000 71,600 = 9,000 950,000 936,000 = 14,000 |45,000 58,000| = 13,000 223,000 223,000 = 0 |339,000 340,000| = 1,000 0

118

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

7. Goodwill Amount (8.2.11) Goodwill Amount = Purchase Dierential (8.2.8) Total Fair/Book Dierence (8.2.9) Goodwill Amount = 0 0 = 0

8. Consolidation Purchase Journal Entry (8.2.14) Since Goodwill Amount (8.2.11) >= 0 then: XX/XX/XX Debit Investment in Subsidiary (8.1.9) ( an Asset) Stock Cost (7.2.1) Cash and/or Stock and/or Debt Debit Credit Investment in Midwestern Book 831,000 Preferred Stock (16,500 at $20) 330,000 Additional Paid-In Preferred 501,000 Credit Stock Cost (7.2.1)

02/01/X5

9. Initial Purchase Elimination Journal Entry (8.2.15) To eliminate the permanent accounts: XX/XX/XX Common Stock Additional Paid-In Capital Retained Earnings Goodwill ( an Asset Account) Preacquisition Earnings Dividends ( a Contra-Equity Account) Investment in Subsidiarysecurity Non-Controlling Interest (8.2.2) Extraordinary Gain Total Fair Book Dierence Table (8.2.10) Debit Common Stock 87,000 Additional Paid-In Capital 331,000 Retained Earnings 595,000 Preacquisition Earnings 95,000 Investment in Midwestern Book Non-Controlling Interest Cash and Receivables Inventory Land 9,000 Plant Assets (net) 14,000 Other Non-Current Assets Long-Term Debt 1,000 1,132,000 Debit Subsidiary @ Purchase Date Subsidiary @ Purchase Date Subsidiary @ Purchase Date (8.2.11) if positive (8.2.6) Credit

Subsidiary @ Purchase Date Beginning Balance (8.2.3) (8.2.13) if negative Goodwill Credit

02/01/X5

831,000 277,000 7,000 4,000

13,000 1,132,000

10. Consolidation Trial Balance Table (8.2.17) in thousands.

8.7. CONSOLIDATION METHOD: PREACQUISITION EARNINGS/75% ACQUISITION School Debit Credit 1,150.0 402.0 56.0 257.0 633.0 2,501.0 854.0 3,985.0 213.0 831.0 1,600.0 1,250.0 22.9 647.0 330.0 501.0 4,231.1 9,732.0 9,732.0 1,802.0 Midwestern Debit Credit 226.0 75.0 10.0 46.0 192.0 414.0 71.0 936.0 58.0 223.0 340.0 87.0 331.0 Elimination Debit Credit

119 Consolidation Debit Credit 1,376.0 477.0 66.0 303.0 95.0 818.0 2,911.0 934.0 4,935.0 258.0 0.0 1,823.0 1,589.0 22.9 647.0 330.0 501.0 4,231.1 277.0 10,797.0 10,797.0

Account Sales Cost of Goods Sold Depreciation Expense Other Expenses Preacquisition Earnings Cash and Receivables Inventory Land Plant Assets (net) Other Non-Current Assets Investment in Midwestern Book Current Liabilities Long-Term Debt Common Stock Additional Paid-In Capital Preferred Stock Additional Paid-In Preferred Retained Earnings Non-Controlling Interest Total

95.0 7.0 4.0 9.0 14.0 13.0 831.0 1.0 87.0 331.0

595.0 1,802.0

595.0 1,132.0 277.0 1,132.0

11. Pro-forma Net Income (5.18.1) n Pro-forma Net Income = + i=1 Net Revenuei Credit Balance n i=1 Expensei Debit Balance n + i=1 Gaini Credit Balance n i=1 Lossi Debit Balance Preacquisition Earnings (8.2.5) Debit Balance Debit Credit Statement Account Sales 1,376.0 Cost of Goods Sold 477.0 Depreciation Expenses 66.0 Other Expenses 303.0 Preacquisition Earnings 95.0 Pro-forma Net Income 435.0 (5.18.1) (1) 12. Book Value Equity (5.18.2) n Book Value Equity = i=1 Equityi Credit Balance Account Debit Credit Statement Common @ Par 22.9 Additional Paid-in Capital 647.0 Retained Earnings 4,231.1 Preferred Stock @ Par 330.0 Additional Paid-in Preferred 501.0 Book Value Equity 5,732.0 (5.18.2) (6) 13. Current Equity (5.18.3) Current Equity = + Book Value Equity (5.18.2) + Pro-forma Net Income (5.18.1) Dividends Declared Debit Balance + Non-Controlling Interest (8.2.2) Current Equity =

5,732.0 435.0 0.0 277.0 6,444.0

14. Current Retained Earnings (5.18.4) Current Retained Earnings = + Pro-forma Net Income (5.18.1) + Retained Earnings Credit Balance Dividends Declared Debit Balance Current Retained Earnings =

435.0 4,231.1 0.0 4666.1

120

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

15. Statement Trial Balance (5.18.5) Template Account Debit Credit Net Revenue1 Amount1 ... Expense1 Amount1 ... Gain1 Amount1 ... Loss1 Amount1 ... Preacquisition Earnings (8.2.5) Amount Pro-forma Net Income Retained Earnings Dividends Declared Amount (3) Current Retained Earnings Net Asset1 Amount1 ... Total Assets Net Liability1 Amount1 ... Total Liabilities Equity1 Amount1 ... Book Value Equity Pro-form Net Income Dividends Declared Non-Controlling Interest (8.2.2) Amount (7) Current Equity

Statement

(5.18.1) (1) Credit Balance (2) (1) + (2) (3) = (5.18.4)


n i=1

Asseti (4)

n i=1

Liabilityi (5)

(5.18.2) (6) (5.18.1) (1) -Debit Balance (3) (6) + (1) (3) + (7) = (5.18.3) (4) = (5) + (5.18.3)

16. Statement Trial Balance (5.18.5) Presentation

8.8. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/100% ACQUISITION Account Sales Cost of Goods Sold Depreciation Expenses Other Expenses Preacquisition Earnings Pro-forma Net Income Retained Earnings Current Retained Earnings Cash and Receivables Inventory Land Plant Assets (net) Other Non-current Assets Total Assets Current Liabilities Long-term Debt Total Liabilities Common @ Par Additional Paid-in Capital Preferred Stock @ Par Additional Paid-in Preferred Retained Earnings Book Value Equity Pro-form Net Income Non-Controlling Interest Current Equity Debit 477.0 66.0 303.0 95.0 435.0 4,231.1 4,666.1 818.0 2,911.0 934.0 4,935.0 258.0 9,856.0 1,823.0 1,589.0 3,412.0 22.9 647.0 330.0 501.0 4,231.1 5,732.0 435.0 277.0 6,444.0 1,132.0 1,132.0 Credit 1,376.0 Statement

121

8.8

Consolidation Method: Subsequent Earnings/100% Acquisition

Example 61 WorldWide (acquirer) purchased Import/Export (acquiree) on 10/1/X5 for $5,604,000 cash. WorldWide acquired 100% of Import/Exports outstanding common stock. Immediately prior to acquisition: Import/Export 10/1/X5 Book Value Market Value Remaining Life Cash 125,000 125,000 Accounts Receivable (net) 350,000 350,000 Inventory 1,750,000 1,850,000 8 months Land 1,520,000 1,520,000 Plant and Equipment (net) 4,799,000 4,739,000 10 years Other Non-current Assets 160,000 120,000 40 months Cost of Goods Sold 850,000 Depreciation Expenses 300,000 Other Expenses 275,000 Dividends 50,000 Total 10,179,000 Current Liabilities Long-Term Debt Common Stock @ Par Additional Paid-in Capital Retained Earnings Sales Revenue Total At 12/31/X5: 1,100,000 2,000,000 230,000 1,624,000 3,425,000 1,800,000 10,179,000 1,100,000 2,000,000

122 Account Cash Accounts Receivable (net) Inventory Land Plant and Equipment (net) Investment in Import/Export Other Non-current Assets Cost of Goods Sold Depreciation Expenses Other Expenses Dividends Total Current Liabilities Long-Term Debt Common Stock @ Par Additional Paid-in Capital Retained Earnings Sales Revenue Investment Income Total WorldWide 3,750,000 5,240,000 13,759,000 3,200,000 28,368,000 5,706,000 159,000 18,450,000 750,000 2,049,000 350,000 81,781,000 13,000,000 18,500,000 600,000 2,243,000 15,600,000 31,706,000 132,000 81,781,000

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Import/Export 162,000 410,000 1,990,000 1,520,000 4,777,000 130,000 1,350,000 450,000 460,000 80,000 11,329,000 1,250,000 2,000,000 230,000 1,624,000 3,425,000 2,800,000 11,329,000

Prepare the elimination journal entry on 12/31/X5. Solution 61: 1. Imputed Market Value (8.2.1) Stock Cost (7.2.1) or (8.1.12) Imputed Market Value = Ownership Percentage (7.6.2) 5,604,000 Imputed Market Value = = 5,604,000 1.0 2. Non-Controlling Interest Amount (8.2.3) Non-Controlling Interest Amount = Imputed Market Value (8.2.1) Stock Cost (7.2.1) or (8.1.12) Non-Controlling Interest Amount = 5,604,000 5,604,000 = 0 3. Preacquisition Earnings Amount (8.2.6) n Preacquisition Earnings Amount = + i=1 Acquiree n + i=1 Acquiree n i=1 Acquiree n i=1 Acquiree Preacquisition Earnings Amount = Revenuei Gaini Expensei Lossi 1,800,000 0 1,425,000 0 375,000

4. Acquiree Equity (8.2.7) Acquiree Equity = + Common Stock at Par + Additional Paid-In Capital + Retained Earnings + Preacquisition Earnings Amount (8.2.6) Dividends Acquiree Equity = 230,000 + 1,624,000 + 3,425,000 + 375,000 50,000 = 5,604,000 5. Purchase Dierential (8.2.8) Purchase Dierential = Imputed Market Value (8.2.1) Acquiree Equity (8.2.7) Purchase Dierential = 5,604,000 5,604,000 = 0 6. Total Fair/Book Dierence (8.2.9) Let m = the number of acquirees assets. Let n = the number of acquirees liabilities. m Total Fair/Book Dierence = i=1 (Fair Value Asseti Book Value Asseti ) n i=1 (Fair Value Liabilityi Book Value Liabilityi )

8.8. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/100% ACQUISITION

123

Total Fair/Book Dierence Table (8.2.10) Account Debit Asset1 Fair Value Asset1 Book Value Asset1 Asset2 Fair Value Asset2 Book Value Asset2 ... Assetm Fair Value Assetm Book Value Assetm Liability1 Liability2 ... Liabilityn Total Fair/Book Dierence (8.2.9)

Credit

Fair Value Liability1 Book Value Liability1 Fair Value Liability2 Book Value Liability2 Fair Value Liabilityn Book Value Liabilityn

Note: if Fair Valuei Book Valuei < 0 then record the absolute value of the dierence in the opposite column. Account Debit Inventory 1,850,000 1,750,000 = 100,000 Plant and Equipment (net) Other Non-Current Assets Total Fair/Book Dierence 7. Goodwill Amount (8.2.11) Goodwill Amount = Purchase Dierential (8.2.8) Total Fair/Book Dierence (8.2.9) Goodwill Amount = 0 0 = 0 8. Consolidation Purchase Journal Entry (8.2.14) Since Goodwill Amount (8.2.11) >= 0 then: XX/XX/XX Investment in Subsidiarysecurity (8.1.9) Cash and/or Stock and/or Debt Debit Investment in Import/Export 5,604,000 Cash Debit Stock Cost (7.2.1) or (8.1.12) Credit 5,604,000 Credit (7.2.1) or (8.1.12) 0 Credit |4,739,000 4,799,000| = 60,000 |120,000 160,000| = 40,000

10/01/X5

9. Consolidation Method: Post-Acquisition Net Income (8.3.1) Apply the Equity Investment: Post-Acquisition Net Income (7.6.6). n Subsidiary Annual Earnings Amount = + i=1 Subsidiary Revenuei 2,800,000 n + i=1 Subsidiary Gaini 0 n Subsidiary Expense 2,260,000 i i=1 n 0 i=1 Subsidiary Lossi Subsidiary Annual Earnings Amount = 540,000 Post-Acquisition Net Income = Subsidiary Annual Earning Amount Preacquisition Earnings (8.2.6) Post-Acquisition Net Income = 540,000 375,000 = 165,000 10. Consolidation Method: Net Income Realization Amount (8.3.2) Apply the Equity Investment: Net Income Realization Amount (7.6.7). Since Acquirees Extraordinary Items = 0 and Since Acquirees Discontinued Operations = 0 then: Net Income Realization Amount = Acquiree Post-Acquisition Net Income (7.6.6) or (8.3.1) Ownership Percentage (7.6.2) Net Income Realization Amount = 165,000 1.0 = 165,000 Journal Entry Debit Credit 12/31/XX Investment in Subsidiarysecurity (7.6.1) (7.6.7) Investment Revenue (7.2.4) (7.6.7)

124 Debit 165,000

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Credit 165,000

12/31/X5

Investment in Import/Export Investment Revenue

11. Consolidation Method: Dividend Realization Amount (8.3.6) Apply the Equity Investment: Majority Dividend Realization Amount (7.6.11). Majority Dividend Realization Amount = Acquirees Dividends Declared Ownership Percentage (7.6.2) Majority Dividend Realization Amount = (80,000 50,000) 1.0 = 30,000 Journal Entry Debit Credit 12/31/XX Cash or Dividends Receivable (7.6.11) Investment in Subsidiarysecurity (7.6.1) (7.6.11) Debit Credit 12/31/X5 Cash 30,000 Investment in Import/Export 30,000 12. Depreciatable Assets Premium/(Discount) (7.6.12) Depreciatable Assets Premium/(Discount) = Acquirees Depreciatable Assets Fair Value Acquirees Depreciatable Assets Book Value Depreciatable Assets Premium/(Discount) = 4,739,000 4,799,000 = -60,000 13. Consolidation Method: Depreciation Realization Amount (8.3.7) Apply the Equity Investment: Depreciation Realization Amount (7.6.13). Since Depreciatable Assets Premium/(Discount) (7.6.12) <> 0 then: Depreciation Realization Amount = Depreciatable Assets Premium/(Discount) (7.6.12)Ownership Percentage (7.6.2) Estimated Average Useful Years Percentage of Year Held (7.6.5) -60,0001.0 3 Depreciation Realization Amount = 12 = -1,500 10 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.13) Investment in Subsidiarysecurity (8.1.9) (7.6.13) Debit Credit 12/31/X5 Investment in Import/Export 1,500 Investment Revenue 1,500 14. Other Assets Premium/(Discount) (7.6.14) Other Assets Premium/(Discount) = Acquirees Other Assets Fair Value Acquirees Other Assets Book Value Other Assets Premium/(Discount) = 120,000 160,000 = -40,000 15. Consolidation Method: Other Amortization Realization Amount (8.3.8) Apply the Equity Investment: Other Amortization Realization Amount (7.6.15). Since Other Assets Premium/(Discount) (7.6.14) <> 0 then: Other Assets Premium/(Discount) (7.6.14)Ownership Percentage (7.6.2) Other Amortization Realization Amount = Estimated Average Useful Months Number of remaining months -40,0001.0 Other Amortization Realization Amount = 3 = -3,000 40 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.15) Investment in Subsidiarysecurity (8.1.9) (7.6.15) Debit Credit 12/31/X5 Investment in Import/Export 3,000 Investment Revenue 3,000 16. Equity Investment: Inventory Premium/(Discount) (7.6.18) Inventory Premium/(Discount) = Acquirees Inventory Fair Value Acquirees Inventory Book Value

8.8. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/100% ACQUISITION Inventory Premium/(Discount) = 1,850,000 1,750,000 = 100,000 17. Consolidation Method: Inventory Realization Amount (8.3.10) Apply the Equity Investment: Inventory Realization Amount (7.6.19). Since Inventory Premium/(Discount) (7.6.18) <> 0 then: Inventory Realization Amount = Inventory Premium (7.6.18) Ownership Percentage (7.6.2) Percentage of Original Inventory Sold During Year Inventory Realization Amount = 100,000 1.0 3 8 = 37,500 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.19) Investment in Subsidiarysecurity (8.1.9) (7.6.19) Debit Credit 12/31/X5 Investment Revenue 37,500 Investment in Import/Export 37,000 18. Subsidiary Depreciation Realization Amount (8.3.11) Since Depreciatable Assets Premium/(Discount) (7.6.12) <> 0 then: Depreciation Realization Amount (7.6.13) Subsidiary Depreciation Realization Amount = Ownership Percentage (7.6.2) -1,500 Subsidiary Depreciation Realization Amount = 1.0 = -1,500 19. Subsidiary Other Amortization Realization Amount (8.3.13) Since Other Assets Premium/(Discount) (7.6.14) <> 0 then: Other Amortization Realization Amount (7.6.15) Subsidiary Other Amortization Realization Amount = Ownership Percentage (7.6.2) -3,000 Subsidiary Other Amortization Realization Amount = 1.0 = -3,000 20. Subsidiary Inventory Realization Amount (8.3.14) Since Inventory Premium/(Discount) (7.6.18) <> 0 then: Inventory Realization Amount (7.6.19) Subsidiary Inventory Realization Amount = Ownership Percentage (7.6.2) 37,500 Subsidiary Inventory Realization Amount = 1.0 = 37,500 21. Subsidiary Investment Income (8.3.15) Subsidiary Investment Income = + Subsidiary Post-Acquisition Net Income (8.3.1) Subsidiary Depreciation Realization Amount (8.3.11) Subsidiary Other Amortization Realization Amount (8.3.13) Subsidiary Inventory Realization Amount (8.3.14) Subsidiary Investment Income = 165,000 -1,500 -3,000 37,500 = 132,000 22. Majority Investment Income (8.3.16) Majority Investment Income = Subsidiary Investment Income (8.3.15) Ownership Percentage (7.6.2) Majority Investment Income = 132,000 1.0 = 132,000

125

23. Initial Purchase Elimination Journal Entry (8.2.15) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Debit Credit XX/XX/XX Common Stock Subsidiary @ Purchase Date Additional Paid-In Capital Subsidiary @ Purchase Date Retained Earnings Subsidiary @ Purchase Date Goodwill ( an Asset Account) (8.2.11) if positive Preacquisition Earnings (8.2.6) Dividends ( a Contra-Equity Account) Subsidiary @ Purchase Date Investment in Subsidiarysecurity Beginning Balance Non-Controlling Interest (8.2.2) (8.2.3) Extraordinary Gain (8.2.13) if negative Goodwill Total Fair Book Dierence Table (8.2.10)

126

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Debit 230,000 1,624,000 3,425,000 375,000 Credit

12/31/X5

Common Stock Additional Paid-In Capital Retained Earnings Preacquisition Earnings Dividends Investment in Import/Export Inventory Plant and Equipment (net) Other Non-current Assets Total

50,000 5,604,000 100,000 60,000 40,000 5,754,000

5,754,000

24. Subsequent Subsidiary Activities Elimination Journal Entry (8.3.18) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Elimination Journal Entry: Subsidiary Activities Debit Credit 12/31/XX Investment Revenue (7.2.4) (8.3.16) Dividends ( a Contra-Equity Account) (7.6.11) Investment in Subsidiarysecurity (8.1.9) (8.3.16) (7.6.11) Debit Credit 12/31/X5 Investment Revenue 132,000 Dividends 30,000 Investment in Import/Export 102,000

25. Amortize Dierentials Elimination Journal Entry (8.3.19) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Note: if the adjustment is negative, then reverse the journal entry. Elimination Journal Entry: Depreciation Amount Debit Credit 12/31/XX Depreciation Expense (8.3.11) PP&E (8.3.11) Elimination Journal Entry: Amortization Amount Debit Credit 12/31/XX Other Expense (8.3.13) Other Assets (8.3.13) Elimination Journal Entry: Inventory Realization Amount Debit Credit 12/31/XX Cost of Goods Sold (8.3.14) Inventory (8.3.14) Elimination Journal Entry, If Goodwill Impairment Amount (8.3.17) > 0 then: Debit Credit 12/31/XX Impairment Loss (8.3.17) Goodwill (8.3.17) Elimination Journal Entry: Depreciation Amount Debit Credit 12/31/X5 Plant and Equipment (net) 1,500 Depreciation Expense 1,500 Elimination Journal Entry: Amortization Amount Debit Credit 12/31/X5 Other Assets 3,000 Other Expense 3,000 Elimination Journal Entry: Inventory Realization Amount Debit Credit 12/31/X5 Cost of Goods Sold 37,500 Inventory 37,500

8.9. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/75% ACQUISITION

127

8.9

Consolidation Method: Subsequent Earnings/75% Acquisition

Example 62 WorldWide (acquirer) purchased Import/Export (acquiree) on 10/1/X5 for $4,203,000 cash. WorldWide acquired 75% of Import/Exports outstanding common stock. Immediately prior to acquisition: Import/Export 10/1/X5 Book Value Market Value Remaining Life Cash 125,000 125,000 Accounts Receivable (net) 350,000 350,000 Inventory 1,750,000 1,850,000 8 months Land 1,520,000 1,520,000 Plant and Equipment (net) 4,799,000 4,739,000 10 years Other Non-current Assets 160,000 120,000 40 months Cost of Goods Sold 850,000 Depreciation Expenses 300,000 Other Expenses 275,000 Dividends 50,000 Total 10,179,000 Current Liabilities Long-Term Debt Common Stock @ Par Additional Paid-in Capital Retained Earnings Sales Revenue Total 1,100,000 2,000,000 230,000 1,624,000 3,425,000 1,800,000 10,179,000 WorldWide 3,750,000 5,240,000 13,759,000 3,200,000 28,368,000 5,706,000 159,000 18,450,000 750,000 2,049,000 350,000 81,781,000 13,000,000 18,500,000 600,000 2,243,000 15,600,000 31,706,000 132,000 81,781,000 1,100,000 2,000,000

At 12/31/X5: Account Cash Accounts Receivable (net) Inventory Land Plant and Equipment (net) Investment in Import/Export Other Non-current Assets Cost of Goods Sold Depreciation Expenses Other Expenses Dividends Total Current Liabilities Long-Term Debt Common Stock @ Par Additional Paid-in Capital Retained Earnings Sales Revenue Investment Income Total

Import/Export 162,000 410,000 1,990,000 1,520,000 4,777,000 130,000 1,350,000 450,000 460,000 80,000 11,329,000 1,250,000 2,000,000 230,000 1,624,000 3,425,000 2,800,000 11,329,000

Prepare the elimination journal entry on 12/31/X5. Solution 62: 1. Imputed Market Value (8.2.1) Stock Cost (7.2.1) or (8.1.12) Imputed Market Value = Ownership Percentage (7.6.2) 4,203,000 Imputed Market Value = = 5,604,000 0.75 2. Non-Controlling Interest Amount (8.2.3)

128

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Non-Controlling Interest Amount = Imputed Market Value (8.2.1) Stock Cost (7.2.1) or (8.1.12) Non-Controlling Interest Amount = 5,604,000 4,203,000 = 1,401,000

3. Preacquisition Earnings Amount (8.2.6) n Preacquisition Earnings Amount = + i=1 Acquiree n + i=1 Acquiree n i=1 Acquiree n i=1 Acquiree Preacquisition Earnings Amount =

Revenuei Gaini Expensei Lossi

1,800,000 0 1,425,000 0 375,000

4. Acquiree Equity (8.2.7) Acquiree Equity = + Common Stock at Par + Additional Paid-In Capital + Retained Earnings + Preacquisition Earnings Amount (8.2.6) Dividends Acquiree Equity = 230,000 + 1,624,000 + 3,425,000 + 375,000 50,000 = 5,604,000 5. Purchase Dierential (8.2.8) Purchase Dierential = Imputed Market Value (8.2.1) Acquiree Equity (8.2.7) Purchase Dierential = 5,604,000 5,604,000 = 0 6. Total Fair/Book Dierence (8.2.9) Let m = the number of acquirees assets. Let n = the number of acquirees liabilities. m Total Fair/Book Dierence = i=1 (Fair Value Asseti Book Value Asseti ) n i=1 (Fair Value Liabilityi Book Value Liabilityi ) Total Fair/Book Dierence Table (8.2.10) Debit Account Asset1 Fair Value Asset1 Book Value Asset1 Asset2 Fair Value Asset2 Book Value Asset2 ... Assetm Fair Value Assetm Book Value Assetm Liability1 Liability2 ... Liabilityn Total Fair/Book Dierence (8.2.9) Credit

Fair Value Liability1 Book Value Liability1 Fair Value Liability2 Book Value Liability2 Fair Value Liabilityn Book Value Liabilityn

Note: if Fair Valuei Book Valuei < 0 then record the absolute value of the dierence in the opposite column. Account Debit Inventory 1,850,000 1,750,000 = 100,000 Plant and Equipment (net) Other Non-Current Assets Total Fair/Book Dierence 7. Goodwill Amount (8.2.11) Goodwill Amount = Purchase Dierential (8.2.8) Total Fair/Book Dierence (8.2.9) Goodwill Amount = 0 0 = 0 8. Consolidation Purchase Journal Entry (8.2.14) Since Goodwill Amount (8.2.11) >= 0 then: XX/XX/XX Investment in Subsidiarysecurity (8.1.9) Cash and/or Stock and/or Debt Debit Stock Cost (7.2.1) or (8.1.12) Credit (7.2.1) or (8.1.12) 0 Credit |4,739,000 4,799,000| = 60,000 |120,000 160,000| = 40,000

8.9. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/75% ACQUISITION Debit 4,203,000 Credit 4,203,000

129

10/01/X5

Investment in Import/Export Cash

9. Consolidation Method: Post-Acquisition Net Income (8.3.1) Apply the Equity Investment: Post-Acquisition Net Income (7.6.6). n Subsidiary Annual Earnings Amount = + i=1 Subsidiary Revenuei 2,800,000 n + i=1 Subsidiary Gaini 0 n 2,260,000 i=1 Subsidiary Expensei n 0 i=1 Subsidiary Lossi Subsidiary Annual Earnings Amount = 540,000 Post-Acquisition Net Income = Subsidiary Annual Earning Amount Preacquisition Earnings (8.2.6) Post-Acquisition Net Income = 540,000 375,000 = 165,000 10. Consolidation Method: Net Income Realization Amount (8.3.2) Apply the Equity Investment: Net Income Realization Amount (7.6.7). Since Acquirees Extraordinary Items = 0 and Since Acquirees Discontinued Operations = 0 then: Net Income Realization Amount = Acquiree Post-Acquisition Net Income (7.6.6) or (8.3.1) Ownership Percentage (7.6.2) Net Income Realization Amount = 165,000 0.75 = 123,750 Journal Entry Debit Credit 12/31/XX Investment in Subsidiarysecurity (7.6.1) (7.6.7) Investment Revenue (7.2.4) (7.6.7) Debit Credit 12/31/X5 Investment in Import/Export 123,750 Investment Revenue 123,750 11. Consolidation Method: Dividend Realization Amount (8.3.6) Apply the Equity Investment: Majority Dividend Realization Amount (7.6.11). Majority Dividend Realization Amount = Acquirees Dividends Declared Ownership Percentage (7.6.2) Majority Dividend Realization Amount = (80,000 50,000) 0.75 = 22,500 Journal Entry Debit Credit 12/31/XX Cash or Dividends Receivable (7.6.11) Investment in Subsidiarysecurity (7.6.1) (7.6.11) Debit Credit 12/31/X5 Cash 22,500 Investment in Import/Export 22,500 12. Depreciatable Assets Premium/(Discount) (7.6.12) Depreciatable Assets Premium/(Discount) = Acquirees Depreciatable Assets Fair Value Acquirees Depreciatable Assets Book Value Depreciatable Assets Premium/(Discount) = 4,739,000 4,799,000 = -60,000 13. Consolidation Method: Depreciation Realization Amount (8.3.7) Apply the Equity Investment: Depreciation Realization Amount (7.6.13). Since Depreciatable Assets Premium/(Discount) (7.6.12) <> 0 then: Depreciation Realization Amount = Depreciatable Assets Premium/(Discount) (7.6.12)Ownership Percentage (7.6.2) Estimated Average Useful Years Percentage of Year Held (7.6.5) -60,0000.75 3 Depreciation Realization Amount = 12 = -1,125 10 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.13) Investment in Subsidiarysecurity (8.1.9) (7.6.13)

130 Debit 1,125

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Credit 1,125

12/31/X5

Investment in Import/Export Investment Revenue

14. Other Assets Premium/(Discount) (7.6.14) Other Assets Premium/(Discount) = Acquirees Other Assets Fair Value Acquirees Other Assets Book Value Other Assets Premium/(Discount) = 120,000 160,000 = -40,000 15. Consolidation Method: Other Amortization Realization Amount (8.3.8) Apply the Equity Investment: Other Amortization Realization Amount (7.6.15). Since Other Assets Premium/(Discount) (7.6.14) <> 0 then: Other Assets Premium/(Discount) (7.6.14)Ownership Percentage (7.6.2) Other Amortization Realization Amount = Estimated Average Useful Months Number of remaining months -40,0000.75 Other Amortization Realization Amount = 3 = -2,250 40 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.15) Investment in Subsidiarysecurity (8.1.9) (7.6.15) Debit Credit 12/31/X5 Investment in Import/Export 2,250 Investment Revenue 2,250 16. Equity Investment: Inventory Premium/(Discount) (7.6.18) Inventory Premium/(Discount) = Acquirees Inventory Fair Value Acquirees Inventory Book Value Inventory Premium/(Discount) = 1,850,000 1,750,000 = 100,000 17. Consolidation Method: Inventory Realization Amount (8.3.10) Apply the Equity Investment: Inventory Realization Amount (7.6.19). Since Inventory Premium/(Discount) (7.6.18) <> 0 then: Inventory Realization Amount = Inventory Premium (7.6.18) Ownership Percentage (7.6.2) Percentage of Original Inventory Sold During Year 3 Inventory Realization Amount = 100,000 0.75 8 = 28,125 Journal Entry Debit Credit 12/31/XX Investment Revenue (7.2.4) (7.6.19) Investment in Subsidiarysecurity (8.1.9) (7.6.19) Debit Credit 12/31/X5 Investment Revenue 28,125 Investment in Import/Export 28,125 18. Subsidiary Depreciation Realization Amount (8.3.11) Since Depreciatable Assets Premium/(Discount) (7.6.12) <> 0 then: Depreciation Realization Amount (7.6.13) Subsidiary Depreciation Realization Amount = Ownership Percentage (7.6.2) -1,125 Subsidiary Depreciation Realization Amount = 0.75 = -1,500 19. Subsidiary Other Amortization Realization Amount (8.3.13) Since Other Assets Premium/(Discount) (7.6.14) <> 0 then: Other Amortization Realization Amount (7.6.15) Subsidiary Other Amortization Realization Amount = Ownership Percentage (7.6.2) -2,250 Subsidiary Other Amortization Realization Amount = 0.75 = -3,000 20. Subsidiary Inventory Realization Amount (8.3.14) Since Inventory Premium/(Discount) (7.6.18) <> 0 then: Inventory Realization Amount (7.6.19) Subsidiary Inventory Realization Amount = Ownership Percentage (7.6.2) 28,125 Subsidiary Inventory Realization Amount = 0.75 = 37,500

8.9. CONSOLIDATION METHOD: SUBSEQUENT EARNINGS/75% ACQUISITION 21. Subsidiary Investment Income (8.3.15) Subsidiary Investment Income = + Subsidiary Post-Acquisition Net Income (8.3.1) Subsidiary Depreciation Realization Amount (8.3.11) Subsidiary Other Amortization Realization Amount (8.3.13) Subsidiary Inventory Realization Amount (8.3.14) Subsidiary Investment Income = 165,000 -1,500 -3,000 37,500 = 132,000 22. Majority Investment Income (8.3.16) Majority Investment Income = Subsidiary Investment Income (8.3.15) Ownership Percentage (7.6.2) Majority Investment Income = 132,000 0.75 = 99,000 23. Minority Investment Income (8.3.20) Minority Investment Income = Subsidiary Investment Income (8.3.15) [1 Ownership Percentage (7.6.2)] Minority Investment Income = 132,000 (1 0.75) = 33,000 24. Minority Dividend Realization Amount (8.3.21) Minority Dividend Realization Amount = Acquirees Dividends Declared [1 Ownership Percentage (7.6.2)] Minority Dividend Realization Amount = (80,000 50,000) (1 0.75) = 7,500

131

25. Initial Purchase Elimination Journal Entry (8.2.15) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Debit Credit XX/XX/XX Common Stock Subsidiary @ Purchase Date Additional Paid-In Capital Subsidiary @ Purchase Date Retained Earnings Subsidiary @ Purchase Date Goodwill ( an Asset Account) (8.2.11) if positive Preacquisition Earnings (8.2.6) Dividends ( a Contra-Equity Account) Subsidiary @ Purchase Date Investment in Subsidiarysecurity Beginning Balance Non-Controlling Interest (8.2.2) (8.2.3) Extraordinary Gain (8.2.13) if negative Goodwill Total Fair Book Dierence Table (8.2.10) Debit Credit 12/31/X5 Common Stock 230,000 Additional Paid-In Capital 1,624,000 Retained Earnings 3,425,000 Preacquisition Earnings 375,000 Dividends 50,000 Investment in Import/Export 4,203,000 Non-Controlling Interest 1,402,000 Inventory 100,000 Plant and Equipment (net) 60,000 Other Non-current Assets 40,000 Total 5,754,000 5,754,000 26. Subsequent Subsidiary Activities Elimination Journal Entry (8.3.18) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Elimination Journal Entry: Subsidiary Activities Debit Credit 12/31/XX Investment Revenue (7.2.4) (8.3.16) Dividends ( a Contra-Equity Account) (7.6.11) Investment in Subsidiarysecurity (8.1.9) (8.3.16) (7.6.11) Debit Credit 12/31/X5 Investment Revenue 99,000 Dividends 22,500 Investment in Import/Export 76,500

132

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

27. Amortize Dierentials Elimination Journal Entry (8.3.19) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Note: if the adjustment is negative, then reverse the journal entry. Elimination Journal Entry: Depreciation Amount Debit Credit 12/31/XX Depreciation Expense (8.3.11) PP&E (8.3.11) Elimination Journal Entry: Amortization Amount Debit Credit 12/31/XX Other Expense (8.3.13) Other Assets (8.3.13) Elimination Journal Entry: Inventory Realization Amount Debit Credit 12/31/XX Cost of Goods Sold (8.3.14) Inventory (8.3.14) Elimination Journal Entry, If Goodwill Impairment Amount (8.3.17) > 0 then: Debit Credit 12/31/XX Impairment Loss (8.3.17) Goodwill (8.3.17) Elimination Journal Entry: Depreciation Amount Debit Credit 12/31/X5 Plant and Equipment (net) 1,500 Depreciation Expense 1,500 Elimination Journal Entry: Amortization Amount Debit Credit 12/31/X5 Other Assets 3,000 Other Expense 3,000 Elimination Journal Entry: Inventory Realization Amount Debit Credit 12/31/X5 Cost of Goods Sold 37,500 Inventory 37,500 28. Non-Controlling Interest Elimination Journal Entry (8.3.22) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Debit Credit 12/31/XX Non-Controlling Interest in Net Income (8.2.4) (8.3.20) Dividends ( a Contra-Equity Account) (8.3.21) Non-Controlling Interest (8.2.2) (8.3.20) (8.3.21) Debit Credit 12/31/X5 Non-Controlling Interest in Net Income 33,000 Dividends 7,500 Non-Controlling Interest 22,500

8.10

Inventory Transaction, One Time, Year0 sold = 0

Example 63 Inventory Sales Amount = $40,000. Cost of Goods Sold = $25,000. Subsidiary Sold Percent in 20X5 (Year0 ) = 0%. Subsidiary Sold Percent in 20X6 (Year1 ) = 60%. Prepare the elimination journal entry for 20X5. Prepare the elimination journal entry for 20X6. Solution 63: 1. Gross Prot (8.5.3) Gross Prot = Sales Amount (8.5.1) Cost of Goods Sold (8.5.2)

8.10. INVENTORY TRANSACTION, ONE TIME, YEAR0 SOLD = 0 Gross Prot = 40,000 25,000 = 15,000 2. Realized Gross Prot (8.5.5) Year 0 Realized Gross Prot = Gross Prot (8.5.3) Sold Percentn (8.5.4) where n >= 0 Realized Gross Prot = 15,000 0 = 0 3. Total Sold Percent (8.5.6) Year 0 n Total Sold Percent = i=0 Sold Percent Yeari (8.5.4) Total Sold Percent = 0 4. Total Deferred Gross Prot (8.5.7) Total Deferred Gross Prot = Gross Prot (8.5.3) [1 Total Sold Percent (8.5.6)] Total Deferred Gross Prot = 15,000 (1 0) = 15,000 5. Eliminate Cost of Goods Sold Year0 (8.5.9) Eliminate Cost of Goods Sold Year0 = Cost of Goods Sold (8.5.2) + Realized Gross Prot (8.5.5) Eliminate Cost of Goods Sold Year0 = 25,000 + 0 = 25,000 6. Eliminate Inventory (8.5.10) Eliminate Inventory = Total Deferred Gross Prot (8.5.7) Eliminate Inventory = 15,000 7. Eliminate Sales (8.5.11) Since in the year the transaction took place (Year0 ) then: Eliminate Sales = Sales Amount (8.5.1) Eliminate Sales = 40,000

133

8. Inventory Transaction Elimination Journal Entry (8.5.16) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since in the year the transaction took place (Year0 ) then: Debit Credit 12/31/XX Sales Revenue Eliminate Sales (8.5.11) Cost of Goods Sold Eliminate Cost of Goods Sold (8.5.9) Inventory Eliminate Inventory (8.5.10) Debit Credit 12/31/X5 Sales Revenue 40,000 Cost of Goods Sold 25,000 Inventory 15,000 9. Realized Gross Prot (8.5.5) Year 1 Realized Gross Prot = Gross Prot (8.5.3) Sold Percentn (8.5.4) where n >= 0 Realized Gross Prot = 15,000 0.60 = 9,000 10. Total Sold Percent (8.5.6) n Total Sold Percent = i=0 Sold Percent Yeari (8.5.4) Total Sold Percent = 0 + 0.60 = 0.60 11. Total Deferred Gross Prot (8.5.7) Total Deferred Gross Prot = Gross Prot (8.5.3) [1 Total Sold Percent (8.5.6)] Total Deferred Gross Prot = 15,000 (1 0.60) = 6,000 12. Eliminate Cost of Goods Sold Yearn (8.5.13) Eliminate Cost of Goods Sold Yearn = Realized Gross Prot (8.5.5) Eliminate Cost of Goods Sold Year1 = 9,000 13. Eliminate Inventory (8.5.10) Eliminate Inventory = Total Deferred Gross Prot (8.5.7) Eliminate Inventory = 6,000

134

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

14. Original Deferred Gross Prot (8.5.8) Original Deferred Gross Prot = Gross Prot (8.5.3) [1 Sold Percent Year0 (8.5.4)] Original Deferred Gross Prot = 15,000 (1 0) = 15,000 15. Eliminate Retained Earnings (8.5.14) Since beyond the year the transaction took place (Yearn where n >= 1) then: Eliminate Retained Earnings = Original Deferred Gross Prot (8.5.8) Eliminate Retained Earnings = 15,000 16. Inventory Transaction Elimination Journal Entry (8.5.16) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since beyond the year the transaction took place (Yearn where n >= 1) then: Debit Credit 12/31/XX Retained Earnings Eliminate Retained Earnings (8.5.14) Cost of Goods Sold Eliminate Cost of Goods Sold (8.5.13) Inventory Eliminate Inventory (8.5.10) Debit Credit 12/31/X6 Retained Earnings 15,000 Cost of Goods Sold 9,000 Inventory 6,000

8.11

Inventory Transaction, One Time, Year0 sold = 30%

Example 64 Inventory Sales Amount = $64,000. Cost of Goods Sold = $48,000. Subsidiary Sold Percent in 20X5 (Year0 ) = 30%. Subsidiary Sold Percent in 20X6 (Year1 ) = 45%. Prepare the elimination journal entry for 20X5. Prepare the elimination journal entry for 20X6. Solution 64: 1. Gross Prot (8.5.3) Gross Prot = Sales Amount (8.5.1) Cost of Goods Sold (8.5.2) Gross Prot = 64,000 48,000 = 16,000 2. Realized Gross Prot (8.5.5) Year 0 Realized Gross Prot = Gross Prot (8.5.3) Sold Percentn (8.5.4) where n >= 0 Realized Gross Prot = 16,000 0.30 = 4,800 3. Total Sold Percent (8.5.6) n Total Sold Percent = i=0 Sold Percent Yeari (8.5.4) Total Sold Percent = 0.30 4. Original Deferred Gross Prot (8.5.8) Since in the year the transaction took place (Year0 ) then: Original Deferred Gross Prot = Gross Prot (8.5.3) [1 Sold Percent Year0 (8.5.4)] Original Deferred Gross Prot = 16,000 (1 0.30) = 11,200 5. Total Deferred Gross Prot (8.5.7) Total Deferred Gross Prot = Gross Prot (8.5.3) [1 Total Sold Percent (8.5.6)] Total Deferred Gross Prot = 16,000 (1 0.30) = 11,200 6. Eliminate Cost of Goods Sold Year0 (8.5.9) Eliminate Cost of Goods Sold Year0 = Cost of Goods Sold (8.5.2) + Realized Gross Prot (8.5.5) Eliminate Cost of Goods Sold Year0 = 48,000 + 4,800 = 52,800

8.11. INVENTORY TRANSACTION, ONE TIME, YEAR0 SOLD = 30% 7. Eliminate Inventory (8.5.10) Eliminate Inventory = Total Deferred Gross Prot (8.5.7) Eliminate Inventory = 11,200 8. Eliminate Sales (8.5.11) Since in the year the transaction took place (Year0 ) then: Eliminate Sales = Sales Amount (8.5.1) Eliminate Sales = 64,000

135

9. Inventory Transaction Elimination Journal Entry (8.5.16) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since in the year the transaction took place (Year0 ) then: Debit Credit 12/31/XX Sales Revenue Eliminate Sales (8.5.11) Cost of Goods Sold Eliminate Cost of Goods Sold (8.5.9) Inventory Eliminate Inventory (8.5.10) Debit Credit 12/31/X5 Sales Revenue 64,000 Cost of Goods Sold 52,800 Inventory 11,200 10. Realized Gross Prot (8.5.5) Year 1 Realized Gross Prot = Gross Prot (8.5.3) Sold Percentn (8.5.4) where n >= 0 Realized Gross Prot = 16,000 0.45 = 7,200 11. Total Sold Percent (8.5.6) n Total Sold Percent = i=0 Sold Percent Yeari (8.5.4) Total Sold Percent = 0.30 + 0.45 = 0.75 12. Total Deferred Gross Prot (8.5.7) Total Deferred Gross Prot = Gross Prot (8.5.3) [1 Total Sold Percent (8.5.6)] Total Deferred Gross Prot = 16,000 (1 0.75) = 4,000 13. Eliminate Cost of Goods Sold Yearn (8.5.13) Eliminate Cost of Goods Sold Yearn = Realized Gross Prot (8.5.5) Eliminate Cost of Goods Sold Year1 = 7,200 14. Eliminate Inventory (8.5.10) Eliminate Inventory = Total Deferred Gross Prot (8.5.7) Eliminate Inventory = 4,000 15. Eliminate Retained Earnings (8.5.14) Since beyond the year the transaction took place (Yearn where n >= 1) then: Eliminate Retained Earnings = Original Deferred Gross Prot (8.5.8) Eliminate Retained Earnings = 11,200 16. Inventory Transaction Elimination Journal Entry (8.5.16) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since beyond the year the transaction took place (Yearn where n >= 1) then: Debit Credit 12/31/XX Retained Earnings Eliminate Retained Earnings (8.5.14) Cost of Goods Sold Eliminate Cost of Goods Sold (8.5.13) Inventory Eliminate Inventory (8.5.10) Debit Credit 12/31/X6 Retained Earnings 11,200 Cost of Goods Sold 7,200 Inventory 4,000

136

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

8.12

Fixed Asset Transaction: End of Year Sale

Example 65 Selling Price = $24,000. Parents Original Cost = $66,000. Parents Accumulated Depreciation = $44,000. Sale Date = 12/31/X5. New Estimated Remaining Years = 4. Prepare the elimination journal entry for 20X5. Solution 65: 1. Book Value (8.6.1) Book Value = Original Cost Accumulated Depreciation Book Value = 66,000 44,000 = 22,000 2. Gain/(Loss) on Sale (8.6.2) Gain/(Loss) on Sale = Selling Price Book Value (8.6.1) Gain/(Loss) on Sale = 24,000 22,000 = 2,000 3. Percentage of Year Subsidiary Held (8.6.3) Since Current Year = Year Of Transaction then: Months Remaining In Year Percentage of Year Subsidiary Held = 12 0 =0 Percentage of Year Subsidiary Held = 12 4. Straight-Line Depreciation Elimination (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 2,000 Straight-Line Depreciation Elimination = 4 0 = 0 5. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 0 6. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 44,000 0 = 44,000 7. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 66,000 24,000 = 42,000 8. Fixed Asset Transaction Elimination Journal Entry Year0 (8.6.8) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since in the year the transaction took place (Year0 ) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Gain Gain/(Loss) on Sale (8.6.2) Depreciation Expense Depreciation Elimination Year0 (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6) Debit Credit 12/31/X5 PP&E 42,000 Gain on Sale of PP&E 2,000 Accumulated Depreciation 44,000

8.13. FIXED ASSET TRANSACTION: BEGIN-YEAR SALE

137

8.13

Fixed Asset Transaction: Begin-Year Sale

Example 66 Selling Price = $264,000. Parents Original Cost = $500,000. Parents Accumulated Depreciation = $300,320. Sale Date = 01/01/X5. New Estimated Remaining Years = 20. Prepare the elimination journal entry for 20X5. Prepare the elimination journal entry for 20X6. Prepare the elimination journal entry for 20X7. Solution 66: 1. Book Value (8.6.1) Book Value = Original Cost Accumulated Depreciation Book Value = 500,000 300,320 = 199,680 2. Gain/(Loss) on Sale (8.6.2) Gain/(Loss) on Sale = Selling Price Book Value (8.6.1) Gain/(Loss) on Sale = 264,000 199,680 = 64,320 3. Fixed Asset Transaction: Percentage of Year Subsidiary Held (8.6.3) 20X5 Since Current Year = Year Of Transaction then: Months Remaining In Year Percentage of Year Subsidiary Held = 12 Percentage of Year Subsidiary Held = 12 = 1.0 12 4. Straight-Line Depreciation Elimination Yearn (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination Yearn = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 64,320 Straight-Line Depreciation Elimination Year0 = 20 1.0 = 3,216 5. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 3,216 6. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 300,320 3,216 = 297,104 7. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 500,000 264,000 = 236,000 8. Fixed Asset Transaction Elimination Journal Entry Year0 (8.6.8) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since in the year the transaction took place (Year0 ) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Gain on Sale of PP&E Gain/(Loss) on Sale (8.6.2) Depreciation Expense Depreciation Elimination Year0 (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6) Debit Credit 12/31/X5 PP&E 236,000 Gain on Sale of PP&E 64,320 Depreciation Expense 3,216 Accumulated Depreciation 297,104

138

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

9. Fixed Asset Transaction: Percentage of Year Subsidiary Held (8.6.3) 20X6 Since Current Year > Year Of Transaction then: Percentage of Year Subsidiary Held = 1.0 10. Straight-Line Depreciation Elimination Yearn (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination Yearn = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 64,320 Straight-Line Depreciation Elimination Year1 = 20 1.0 = 3,216 11. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 3,216 + 3,216 = 6,432 12. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 300,320 6,432 = 293,888 13. Eliminate Retained Earnings (8.6.9) Since beyond the year the transaction took place (Yearn where n >= 1) then: Eliminate Retained Earnings = Gain/(Loss) on Sale (8.6.2) Total Depreciation Elimination (8.6.5) + Straight-Line Depreciation Elimination Yearn (8.6.4) Eliminate Retained Earnings = 64,320 6,432 + 3,216 = 61,104 14. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 500,000 264,000 = 236,000 15. Fixed Asset Transaction Elimination Journal Entry Yearn (8.6.10) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since beyond the year the transaction took place (Yearn where n >= 1) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Retained Earnings Eliminate Retained Earnings (8.6.9) Depreciation Expense (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6) Debit Credit 12/31/X6 PP&E 236,000 Retained Earnings 61,104 Depreciation Expense 3,216 Accumulated Depreciation 293,888 16. Fixed Asset Transaction: Percentage of Year Subsidiary Held (8.6.3) 20X7 Since Current Year > Year Of Transaction then: Percentage of Year Subsidiary Held = 1.0 17. Straight-Line Depreciation Elimination Yearn (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination Yearn = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 64,320 Straight-Line Depreciation Elimination Year1 = 20 1.0 = 3,216 18. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 3,216 + 3,216 + 3,216 = 9,648 19. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 300,320 9,648 = 290,672

8.14. FIXED ASSET TRANSACTION: MID-YEAR SALE 20. Eliminate Retained Earnings (8.6.9) Since beyond the year the transaction took place (Yearn where n >= 1) then: Eliminate Retained Earnings = Gain/(Loss) on Sale (8.6.2) Total Depreciation Elimination (8.6.5) + Straight-Line Depreciation Elimination Yearn (8.6.4) Eliminate Retained Earnings = 64,320 9,648 + 3,216 = 57,888 21. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 500,000 264,000 = 236,000

139

22. Fixed Asset Transaction Elimination Journal Entry Yearn (8.6.10) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since beyond the year the transaction took place (Yearn where n >= 1) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Retained Earnings Eliminate Retained Earnings (8.6.9) Depreciation Expense (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6) Debit Credit 12/31/X7 PP&E 236,000 Retained Earnings 57,888 Depreciation Expense 3,216 Accumulated Depreciation 290,672

8.14

Fixed Asset Transaction: Mid-Year Sale

Example 67 Selling Price = $264,000. Parents Original Cost = $500,000. Parents Accumulated Depreciation = $300,320. Sale Date = 05/01/X5. New Estimated Remaining Years = 20. Prepare the elimination journal entry for 20X5. Prepare the elimination journal entry for 20X6. Solution 67: 1. Book Value (8.6.1) Book Value = Original Cost Accumulated Depreciation Book Value = 500,000 300,320 = 199,680 2. Gain/(Loss) on Sale (8.6.2) Gain/(Loss) on Sale = Selling Price Book Value (8.6.1) Gain/(Loss) on Sale = 264,000 199,680 = 64,320 3. Fixed Asset Transaction: Percentage of Year Subsidiary Held (8.6.3) 20X5 Since Current Year = Year Of Transaction then: Months Remaining In Year Percentage of Year Subsidiary Held = 12 8 Percentage of Year Subsidiary Held = 12 4. Straight-Line Depreciation Elimination Yearn (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination Yearn = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 64,320 8 Straight-Line Depreciation Elimination Year0 = 20 12 = 2,144 5. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 2,144

140

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES

6. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 300,320 2,144 = 298,176 7. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 500,000 264,000 = 236,000 8. Fixed Asset Transaction Elimination Journal Entry Year0 (8.6.8) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since in the year the transaction took place (Year0 ) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Gain on Sale of PP&E Gain/(Loss) on Sale (8.6.2) Depreciation Expense Depreciation Elimination Year0 (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6) Debit Credit 12/31/X5 PP&E 236,000 Gain on Sale of PP&E 64,320 Depreciation Expense 2,144 Accumulated Depreciation 298,176 9. Fixed Asset Transaction: Percentage of Year Subsidiary Held (8.6.3) 20X6 Since Current Year > Year Of Transaction then: Percentage of Year Subsidiary Held = 1.0 10. Straight-Line Depreciation Elimination Yearn (8.6.4) Gain/(Loss) on Sale (8.6.2) Straight-Line Depreciation Elimination Yearn = New Estimated Useful Years Percentage of Year Subsidiary Held (8.6.3) 64,320 Straight-Line Depreciation Elimination Year1 = 20 1.0 = 3,216 11. Total Depreciation Elimination (8.6.5) n Total Depreication Elimination = i=0 Straight-Line Depreciation Elimination Yeari (8.6.4) Total Depreication Elimination = 2,144 + 3,216 = 5,360 12. Eliminate Accumulated Depreciation (8.6.6) Eliminate Accumulated Depreciation = Original Accumulated Depreciation Total Depreciation Elimination (8.6.5) Eliminate Accumulated Depreciation = 300,320 5,360 = 294,960 13. Eliminate Retained Earnings (8.6.9) Since beyond the year the transaction took place (Yearn where n >= 1) then: Eliminate Retained Earnings = Gain/(Loss) on Sale (8.6.2) Total Depreciation Elimination (8.6.5) + Straight-Line Depreciation Elimination Yearn (8.6.4) Eliminate Retained Earnings = 64,320 5,360 + 3,216 = 62,176 14. Eliminate Fixed Asset (8.6.7) Eliminate Fixed Asset = Parents Original Cost Selling Price Eliminate Fixed Asset = 500,000 264,000 = 236,000 15. Fixed Asset Transaction Elimination Journal Entry Yearn (8.6.10) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Since beyond the year the transaction took place (Yearn where n >= 1) and Since Gain/(Loss) on Sale (8.6.2) > 0 then: Debit Credit 12/31/XX PP&E Eliminate Fixed Asset (8.6.7) Retained Earnings Eliminate Retained Earnings (8.6.9) Depreciation Expense (8.6.4) Accumulated Depreciation Eliminate Accumulated (8.6.6)

8.15. CONSOLIDATED DIVIDENDS Debit 236,000 62,176 Credit

141

12/31/X6

PP&E Retained Earnings Depreciation Expense Accumulated Depreciation

3,216 294,960

8.15

Consolidated Dividends

Example 68 Houseman Corporation purchased 100 percent of Riddle Corporation on October 1, 20X1. Prior to the acquisition date, Houseman and Riddle declared and paid dividends of $90,000 and $20,000, respectively. Subsequent to the acquisition, Houseman and Riddle declared and paid dividends of $45,000 and $15,000, respectively. What amount of dividends is include on the consolidated nancial statements?

Solution 68: 1. Housemans pre-acquisition dividends declared Debit Credit 09/30/20X1 Dividends 90,000 Cash 90,000 2. Riddles pre-acquisition dividends declared Debit Credit 09/30/20X1 Dividends 20,000 Cash 20,000 3. Initial Purchase Elimination Journal Entry (8.2.15) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Debit Credit XX/XX/XX Common Stock at Par Subsidiary @ Purchase Date Additional Paid-In Capital Subsidiary @ Purchase Date Retained Earnings Subsidiary @ Purchase Date Goodwill ( an Asset Account) (8.2.11) if positive Preacquisition Earnings (8.2.6) Dividends ( a Contra-Equity Account) Subsidiary @ Purchase Investment in Subsidiarysecurity Beginning Balance Non-Controlling Interest (8.2.2) (8.2.3) Extraordinary Gain (8.2.13) if negative Total Fair Book Dierence Table (8.2.10) Debit Credit 10/01/20X1 Dividends 20,000 4. Housemans post-acquisition dividends declared Debit Credit 12/31/20X1 Dividends 45,000 Cash 45,000 5. Riddles post-acquisition dividends declared Debit Credit 12/31/20X1 Dividends 15,000 Cash 15,000 6. Dividend Realization Amount (8.3.6) Apply the Equity Investment: Majority Dividend Realization Amount (7.6.11). Majority Dividend Realization Amount = Acquirees Dividends Declared Ownership Percentage (7.6.2) Majority Dividend Realization Amount = 15,000 1.0 = 15,000 Journal Entry

142

CHAPTER 8. CONSOLIDATION METHOD EXAMPLES Debit (7.6.11) Credit (7.6.11)

XX/XX/XX

12/31/20X1

Cash or Dividends Receivable Investment in Subsidiarysecurity (7.6.1) Debit Credit Cash 15,000 Investment in Riddle 15,000

7. Subsequent Subsidiary Activities Elimination Journal Entry (8.3.18) The Elimination Entity is a ctional entity. It is is used to help consolidate the Parent with the Subsidiary (8.1.9). Elimination Journal Entry: Subsidiary Activities Debit Credit 12/31/XXXX Investment Revenue (7.2.4) (8.3.16) Dividends ( a Contra-Equity Account) (7.6.11) Investment in Subsidiarysecurity (8.1.9) (8.3.16) (7.6.11) Debit Credit 12/31/20X1 Dividends 15,000 8. Ledgers Housemans Dividends 09/30/X1 90,000 12/31/X1 45,000 balance 135,000 Riddles Dividends 09/30/X1 20,000 12/31/X1 15,000 balance 35,000 Eliminated Dividends 09/30/X1 20,000 12/31/X1 15,000 balance 35,000 Consolidated Dividends 09/30/X1 90,000 12/31/X1 45,000 09/30/X1 20,000 12/31/X1 15,000 09/30/X1 20,000 12/31/X1 15,000 balance 135,000 The dividends included on the consolidated nancial statement is $135,000. This is equal to the parents dividends declared.

Chapter 9

Lease Examples
9.1 Operating Lease

Example 69, 20X5: Lease Term = 20 years. Rent = $6,000, due each January 1. Age of Leased Item = brand new. Fair Value of Leased Item = $60,000. Cost of Asset to Lessor = $60,000. Estimated Economic Life = 30 years. Estimated Residual Value (unguaranteed) = $5,000. Executory costs lessee pays the vendor directly = $300 per year. Item is returned at end of term. Lessees incremental borrowing rate = 12%. Lessors incremental borrowing rate = unknown. Show that this is an operating lease for the lessee. Solution 69:

1. Transfer of Ownership Test If the item being leased stays with the lessee after the Lease Term (9.3.2), then it is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since the item being leased is being returned to the lessor, then: the Transfer of Ownership Test fails.

2. Bargain Purchase Option Test A Bargain Purchase Option (9.3.11) automatically results in a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since there is no Bargain Purchase Option then: the Bargain Purchase Option Test fails.

3. Present Value Minimum Lease Payments for Lessee (9.3.12) PV Minimum Lease Payments for Lessee = Capital Lease Rent (9.3.5) pvad[$1, Lessee Interest Rate (9.3.4), Lease Term (9.3.2)] pv[Guaranteed Residual Value (9.3.8), Lessee Interest Rate, Lease Term] pv[Bargain Purchase Option (9.3.11), Lessee Interest Rate, Lease Term] pv[Bogus Failure To Renew Penalty (9.3.10), Lessee Interest Rate, Lease Term] 143

144 PV Minimum Lease Payments for Lessee = 6,000 pvad[$1, 12%, 20] pv[0, 12%, 20] = 6,000 8.36578 0 = 50,194.78 + +

CHAPTER 9. LEASE EXAMPLES

4. Last Quarter Economic Age (9.3.16) Last Quarter Economic Age = Total Economic Years (9.3.14) 0.75 Last Quarter Economic Age = 30 0.75 = 22.5 5. Remaining Years Ratio (9.3.17) Remaining Years Ratio = Remaining Years Ratio Lease Term (9.3.2) Remaining Economic Years (9.3.15) 20 = 30 = 0.67

6. Economic Life Test After the end of the Lease Term (9.3.2), is the items economic life almost over? First, is the items economic life almost over at the beginning of the lease? If Assets Age >= Last Quarter Economic Age (9.3.16) then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). If Assets Age < Last Quarter Economic Age (9.3.16) then: The Economic Life Test Continues. Check the second step. Since Assets Age = 0 and 0 is < 22.5 then: The Economic Life Test Continues. Check the second step. Second, is the items economic life almost over at the end of the lease? If Remaining Years Ratio (9.3.17) >= 0.75 then: The Economic Life Test Passes. It is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). If Remaining Years Ratio (9.3.17) < 0.75 then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). Since Remaining Years Ratio = 0.67 and 0.67 is < 0.75 then: The Economic Life Test Fails. 7. Lessee Minimum Lease Payments Ratio (9.3.18) PV Minimum Lease Payments for Lessee (9.3.12) Lessee Minimum Lease Payments Ratio = Leased Item Fair Value (9.3.6) 50,194.78 Lessee Minimum Lease Payments Ratio = 60,000.00 = 0.84 8. Recovery Of Investment Test If Lessee Minimum Lease Payments Ratio (9.3.18) >= 0.90 then: Capital Lease (9.3) for the Lessee (9.5). Since Lessee Minimum Lease Payments Ratio = 0.84 and 0.84 is not >= 0.90 then: the Recovery Of Investment Test fails. 9. Since all of the Capital Lease Tests (9.4) fail, it is an operating lease for the lessee.

9.2

Capital Lease: Lessee

Example 70, 20X5:

9.2. CAPITAL LEASE: LESSEE Leased item = truck. Lease Term = 3 years. Rent = $5,582.62, due each January 1. Age of Leased Item = brand new. Fair Value of Leased Item = $20,000. Cost of Asset to Lessor = $15,000. Estimated Economic Life = 7 years. Guaranteed Residual Value = $7,000. Executory costs lessee pays the vendor directly = $500 per year. Item is returned at end of term. Lessees incremental borrowing rate = 12%. Lessors incremental borrowing rate = unknown. Show that this is a capital lease for the lessee. Prepare one year of lessees complete journal entries and three years of the depreciation (straight-line). Solution 70:

145

1. Transfer of Ownership Test If the item being leased stays with the lessee after the Lease Term (9.3.2), then it is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since the item being leased is being returned to the lessor, then: the Transfer of Ownership Test fails. 2. Bargain Purchase Option Test A Bargain Purchase Option (9.3.11) automatically results in a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since there is no Bargain Purchase Option then: the Bargain Purchase Option Test fails.

3. Present Value Minimum Lease Payments for Lessee (9.3.12) PV Minimum Lease Payments for Lessee = Capital Lease Rent (9.3.5) pvad[$1, Lessee Interest Rate (9.3.4), Lease Term (9.3.2)] pv[Guaranteed Residual Value (9.3.8), Lessee Interest Rate, Lease Term] pv[Bargain Purchase Option (9.3.11), Lessee Interest Rate, Lease Term] pv[Bogus Failure To Renew Penalty (9.3.10), Lessee Interest Rate, Lease Term] PV Minimum Lease Payments for Lessee = 5,582.62 pvad[$1, 12%, 3] + pv[7,000, 12%, 3] = 5,582.62 2.69005 + 4,982.46 = 20,000.00 ( rounded) 4. Last Quarter Economic Age (9.3.16) Last Quarter Economic Age = Total Economic Years (9.3.14) 0.75 Last Quarter Economic Age = 3 0.75 = 2.25 5. Remaining Years Ratio (9.3.17) Remaining Years Ratio = Remaining Years Ratio Lease Term (9.3.2) Remaining Economic Years (9.3.15) 3 = 7 = 0.43

6. Economic Life Test After the end of the Lease Term (9.3.2), is the items economic life almost over?

146

CHAPTER 9. LEASE EXAMPLES First, is the items economic life almost over at the beginning of the lease? If Assets Age >= Last Quarter Economic Age (9.3.16) then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). If Assets Age < Last Quarter Economic Age (9.3.16) then: The Economic Life Test Continues. Check the second step. Since Assets Age = 0 and 0 is < 2.25 then: The Economic Life Test Continues. Check the second step. Second, is the items economic life almost over at the end of the lease? If Remaining Years Ratio (9.3.17) >= 0.75 then: The Economic Life Test Passes. It is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). If Remaining Years Ratio (9.3.17) < 0.75 then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). Since Remaining Years Ratio = 0.43 and 0.43 is < 0.75 then: The Economic Life Test Fails.

7. Lessee Minimum Lease Payments Ratio (9.3.18) PV Minimum Lease Payments for Lessee (9.3.12) Lessee Minimum Lease Payments Ratio = Leased Item Fair Value (9.3.6) 20,000 Lessee Minimum Lease Payments Ratio = 20,000 = 1.0 8. Recovery Of Investment Test If Lessee Minimum Lease Payments Ratio (9.3.18) >= 0.90 then: Capital Lease (9.3) for the Lessee (9.5). Since Lessee Minimum Lease Payments Ratio = 1.0 and 1.0 is >= 0.90 then: the Recovery Of Investment Test passes. 9. Lessee Capitalized Amount (9.5.2) Lessee Capitalized Amount = Capital Lease Rent (9.3.5) pvad($1, Lessee Interest Rate (9.3.4), Lease Term (9.3.2) pv(Bargain Purchase Option (9.3.11), Lesee Interest Rate, Lease Term) pv(Guaranteed Residual Value (9.3.8), Lesee Interest Rate, Lease Term) = 5,582.62 2.69005 + 4,982.46 = 20,000.00 + +

(9.5.2) Lessee Capitalized Amount

Journal Entry 01/01/XX Capital Leaseitem Lease Liability (9.5.1) Capital Lease Truck Lease Liability (9.5.1) Debit (9.5.2) Debit 20,000.00 Credit (9.5.2) Credit 20,000.00

01/01/X5 Ledgers

Lease Liability 01/01/X5 20,000.00 balance 20,000.00 Capital Lease Truck 01/01/X5 20,000 balance 20,000 10. Lease Liability Reduction, First Rent Payment (9.5.3) Lease Liability Reduction, First Rent Payment = Lease Payment (9.3.23) Included Executory Costs (9.3.21)

9.2. CAPITAL LEASE: LESSEE (9.5.3) Lease Liability Reduction, First Rent Payment = = 5,582.62 5,582.62 0

147

Journal Entry, Lessees First Rent Payment If Included Executory Cost (9.3.21) = 0 then: Debit Credit Ledger 01/01/XX Lease Liability (9.5.1) (9.5.3) Cash (9.3.23) Debit Credit 01/01/X5 Lease Liability (9.5.1) 5,582.62 Cash 5,582.62 Ledger Lease Liability 01/01/X5 20,000.00 01/01/X5 5,582.62 balance 14,417.38 11. Lessee Interest Expense (9.5.5) Lessee Interest Expense = Lease Liability (9.5.1) Balance Lessee Interest Rate (9.3.4) (9.5.5) Lessee Interest Expense = 14,417.38 0.12 = 1,730.09 Journal Entry Debit Credit 12/31/XX Interest Expense (9.5.5) Interest Payable (9.5.5) Debit Credit 12/31/X5 Interest Expense 1,730.09 Interest Payable 1,730.09 12. Lessee Straight-Line Depreciation Denominator (9.5.6) If Lessee Keeps the Leased Item then: Lessee Straight-Line Depreciation Denominator = Remaining Economic Years (9.3.15) If Lessee Returns the Leased Item then: Lessee Straight-Line Depreciation Denominator = Lease Term (9.3.2) Since Lessee Returns the Leased Item then: Lessee Straight-Line Depreciation Denominator = 3 13. Lessee Depreciation Residual Value (9.5.7) If Lessee Keeps the Leased Item then: Lessee Depreciation Residual Value = Residual Value (9.3.7) If Lessee Returns the Leased Item then: Lessee Depreciation Residual Value = Guaranteed Residual Value (9.3.8) Since Lessee Returns the Leased Item then: Lessee Depreciation Residual Value = 7,000 14. Lessee Depreciation Expense (9.5.8) Capitalized Amount (9.5.2) Lessee Depreciation Residual Value (9.5.7) Lessee Depreciation Expense = Lessee Straight-Line Depreciation Denominator (9.5.6) 20,000 7,000 Lessee Depreciation Expense = 3 = 4,333.33 15. Journal Entry, year 2005 12/31/XX Depreciation Expense Accumulated Depreciationitem Depreciation Expense Accumulated Depreciation Truck Debit (9.5.8) Credit

12/31/X5

(9.5.8) Debit Credit 4,333.33 4,333.33

148 Capital Lease Truck 01/01/X5 20,000 balance 20,000 Accumulated Depreciation Truck 01/01/X5 4,333.33 balance 4,333.33 Truck Book Value = 20,000 4,333.33 = 15,666.67 16. Journal Entry, year 2006 12/31/X6 Depreciation Expense Accumulated Depreciation Truck Capital Lease Truck 01/01/X5 20,000 balance 20,000 Accumulated Depreciation Truck 01/01/X5 4,333.33 01/01/X6 4,333.33 balance 8,666.66 Truck Book Value = 20,000 8,666.66 = 11,333.34 17. Journal Entry, year 2007 12/31/X7 Depreciation Expense Accumulated Depreciation Truck Capital Lease Truck 01/01/X5 20,000 balance 20,000 Accumulated Depreciation Truck 01/01/X5 4,333.33 01/01/X6 4,333.33 01/01/X7 4,333.33 balance 13,000.00 Truck Book Value = 20,000 13,000 = 7,000 Note: Truck Book Value = Guaranteed Residual Value Debit 4,333.33 Credit 4,333.33 Debit 4,333.33 Credit 4,333.33

CHAPTER 9. LEASE EXAMPLES

9.3

Capital Lease: Lessor

Example 71, 20X5: Leased item = truck. Lease Term = 3 years. Rent = $5,582.62, due each January 1. Age of Leased Item = brand new. Fair Value of Leased Item = $20,000. Cost of Asset to Lessor = $15,000. Estimated Economic Life = 7 years. Guaranteed Residual Value = $7,000. Executory costs lessee pays the vendor directly = $500 per year. Item is returned at end of term. Lessors incremental borrowing rate = 12%. Show that this is a capital lease for the lessor. Prepare the lessors lease receivable journal entry.

9.3. CAPITAL LEASE: LESSOR Solution 71:

149

1. Transfer of Ownership Test If the item being leased stays with the lessee after the Lease Term (9.3.2), then it is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since the item being leased is being returned to the lessor, then: the Transfer of Ownership Test fails. 2. Bargain Purchase Option Test A Bargain Purchase Option (9.3.11) automatically results in a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). Since there is no Bargain Purchase Option then: the Bargain Purchase Option Test fails. 3. Last Quarter Economic Age (9.3.16) Last Quarter Economic Age = Total Economic Years (9.3.14) 0.75 Last Quarter Economic Age = 3 0.75 = 2.25 4. Remaining Years Ratio (9.3.17) Remaining Years Ratio = Remaining Years Ratio Lease Term (9.3.2) Remaining Economic Years (9.3.15) 3 = 7 = 0.43

5. Economic Life Test After the end of the Lease Term (9.3.2), is the items economic life almost over? First, is the items economic life almost over at the beginning of the lease? If Assets Age >= Last Quarter Economic Age (9.3.16) then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). If Assets Age < Last Quarter Economic Age (9.3.16) then: The Economic Life Test Continues. Check the second step. Since Assets Age = 0 and 0 is < 2.25 then: The Economic Life Test Continues. Check the second step. Second, is the items economic life almost over at the end of the lease? If Remaining Years Ratio (9.3.17) >= 0.75 then: The Economic Life Test Passes. It is a Capital Lease (9.3) for both the Lessee (9.5) and the Lessor (9.6). If Remaining Years Ratio (9.3.17) < 0.75 then: The Economic Life Test Fails. Check the other tests for Capital Lease Accounting (9.3). Since Remaining Years Ratio = 0.43 and 0.43 is < 0.75 then: The Economic Life Test Fails.

6. Present Value Minimum Lease Payments for Lessor (9.3.13) PV Minimum Lease Payments for Lessor = Capital Lease Rent (9.3.5) pvad[$1, Lessor Interest Rate (9.3.3), Lease Term (9.3.2)] pv[Guaranteed Residual Value (9.3.8), Lessee Interest Rate, Lease Term] pv[Bargain Purchase Option (9.3.11), Lessee Interest Rate, Lease Term] pv[Third Party Guarantee (9.3.9), Lessor Interest Rate, Lease Term] pv[Bogus Failure To Renew Penalty (9.3.10), Lessee Interest Rate, Lease Term]

150 PV Minimum Lease Payments for Lessor = 5,582.62 pvad[$1, 12%, 3] pv[7,000, 12%, 3] = 5,582.62 2.69005 4,982.46 = 20,000.00 + +

CHAPTER 9. LEASE EXAMPLES

7. Lessor Minimum Lease Payments Ratio (9.3.19) PV Minimum Lease Payments for Lessor (9.3.13) Lessor Minimum Lease Payments Ratio = Leased Item Fair Value (9.3.6) 20,000.00 Lessor Minimum Lease Payments Ratio = 20,000.00 = 1.0 8. (Lease Payment (9.3.23) Lease Payment = Capital Lease Rent (9.3.5) + Included Executory Costs (9.3.21) Lease Payment = 5,582.62 + 0.00 = 5,582.62 9. Recovery Of Investment Test (9.4.6) If Lessor Minimum Lease Payments Ratio (9.3.19) >= 0.90 then: Capital Lease (9.3) for the Lessor (9.6). If Lessor Minimum Lease Payments Ratio (9.3.19) >= 0.90 then: Capital Lease (9.3) for the Lessor (9.6). Since Lessor Minimum Lease Payments Ratio = 1.0 and 1.0 is >= 0.90 then: the Recovery Of Investment Test passes. 10. Lessor Receivable Amount (9.6.9) Lessor Receivable Amount = [Capital Lease Rent (9.3.5) Lease Term (9.3.2)] Bargain Purchase Option (9.3.11) Residual Value (9.3.7) Guaranteed Residual Value (9.3.8) Bogus Failure To Renew Penality (9.3.10) Third Party Guarantee (9.3.9) Lessor Receivable Amount = 16,747.86 + 7,000.00 = 23,747.86

+ + + + +

11. Lessor Unearned Interest Revenue (9.6.10) Lessor Unearned Interest Revenue = Lessor Receivable Amount (9.6.9) Leased Item Fair Value (9.3.6) Lessor Unearned Interest Revenue = 23,747.86 20,000.00 = 3,747.86 12. (Lessor Dealers Prot (9.6.3) Lessor Dealers Prot = Leased Item Fair Value (9.3.6) Book Value Lessor Dealers Prot = 20,000 15,000 = 5,000 13. Lessor Sales Revenue (9.6.6) Lessor Sales Revenue = Leased Item Fair Value (9.3.6) pv[Residual Value (9.3.7), Lessor Interest Rate, Lease Term] Lessor Sales Revenue = 20,000 0 = 20,000 14. Lessor Cost of Goods Sold (9.6.7) Lessor Cost of Goods Sold = Book Value pv[Residual Value (9.3.7), Lessor Interest Rate, Lease Term] Lessor Cost of Goods Sold = 15,000 0 = 15,000

9.4. CAPITAL LEASE: LESSEE 15. Lessor Lease Receivable Journal Entry If Lessor Dealers Prot (9.6.3) > 0 then: 01/01/X5 Lease Receivable (9.6.8) Cost of Goods Sold Sales Revenue Equipment Truck Lessor Unearned Interest Revenue Debit 23,747.86 15,000.00 Credit

151

20,000.00 15,000.00 3,747.86

9.4

Capital Lease: Lessee

Example 72, 20X3: Lease Term = 5 years. Lease Payments = $25,981.62, due each January 1. Age of Leased Item = brand new. Fair Value of Leased Item = $100,000. Estimated Economic Life = 5 years. Estimated Residual Value = $0. Annual property taxes lessee pays to lessor to pay the government = $2,000. Item is returned at end of term. Lessees incremental borrowing rate = 11%. Lessors incremental borrowing rate = 10% (known to Lessee). Prepare one year of lessees complete journal entries and year two of the rent payment. Solution 72:

1. Capital Lease Rent (9.3.5) Capital Lease Rent = Lease Payment (9.3.23) Included Executory Costs (9.3.21) (9.3.5) Capital Lease Rent = 25,981,62 2,000 = 23,981.62 2. Lessee Interest Rate (9.3.4) The Lessee Interest Rate is = (a) The the incremental interest rate the lessee would be charged to borrow the value of the item being leased or (b) The Lessor Interest Rate (9.3.3) if known and is less than the Lessees Incremental Interest Rate. (9.3.4) The Lessee Interest Rate is = 10%

3. Present Value Minimum Lease Payments for Lessee (9.3.12) PV Minimum Lease Payments for Lessee = Capital Lease Rent (9.3.5) pvad[$1, Lessee Interest Rate (9.3.4), Lease Term (9.3.2)] pv[Guaranteed Residual Value (9.3.8), Lessee Interest Rate, Lease Term] pv[Bargain Purchase Option (9.3.11), Lessee Interest Rate, Lease Term] pv[Bogus Failure To Renew Penalty (9.3.10), Lessee Interest Rate, Lease Term] PV Minimum Lease Payments for Lessee = 23,981.62 pvad[$1, 10%, 5] + pv[0, 10%, 5] = 23,981.62 4.16986 + 0 = 100,000 4. Lessee Minimum Lease Payments Ratio (9.3.18) PV Minimum Lease Payments for Lessee (9.3.12) Lessee Minimum Lease Payments Ratio = Leased Item Fair Value (9.3.6) 100,000 Lessee Minimum Lease Payments Ratio = 100,000 = 1.0

152 5. Recovery Of Investment Test If Lessee Minimum Lease Payments Ratio (9.3.18) >= 0.90 then: Capital Lease (9.3) for the Lessee (9.5). Since 1.0 >= 0.90 then Capital Lease (9.3) for the Lessee (9.5).

CHAPTER 9. LEASE EXAMPLES

6. Lessee Capitalized Amount (9.5.2) Lessee Capitalized Amount = Capital Lease Rent (9.3.5) pvad($1, Lessee Interest Rate (9.3.4), Lease Term (9.3.2) pv(Bargain Purchase Option (9.3.11), Lesee Interest Rate, Lease Term) pv(Guaranteed Residual Value (9.3.8), Lesee Interest Rate, Lease Term) Lessee Capitalized Amount = 23,981.62 4.16986 + 0 = 100,000.00 Journal Entry 01/01/XX Capital Leaseitem Lease Liability (9.5.1) Capital Leaseitem Lease Liability (9.5.1) Debit (9.5.2) Debit 100,000 Credit (9.5.2) Credit 100,000

+ +

01/01/X3

Ledger Lease Liability 01/01/X3 100,000 balance 100,000 7. Lease Liability Reduction, First Rent Payment (9.5.3) Lease Liability Reduction, First Rent Payment = Lease Payment (9.3.23) Included Executory Costs (9.3.21) Lease Liability Reduction, First Rent Payment = 25,981.62 2,000 = 23,981.62 Journal Entry, Lessees First Rent Payment If Included Executory Costs (9.3.21) > 0 then: Debit Credit 01/01/XX Lease Liability (9.5.1) (9.5.3) Executory Expenseitem (9.3.21) Cash (9.3.23) Debit Credit 01/01/X3 Lease Liability (9.5.1) 23,981.62 Executory Expenseitem 2,000 Cash 25,981.62 Ledger Lease Liability 01/01/X3 100,000 01/01/X3 23,981.62 balance 76,018.38 8. Lessee Interest Expense (9.5.5) Lessee Interest Expense = Lease Liability (9.5.1) Balance Lessee Interest Rate (9.3.4) Lessee Interest Expense = 76,018.38 0.10 = 7,601.84 Journal Entry 12/31/XX Interest Expense Interest Payable Debit (9.5.5) Credit (9.5.5)

9.4. CAPITAL LEASE: LESSEE Debit 7,601.84 Credit 7,601.84

153

12/31/X3

Interest Expense Interest Payable

9. Lessee Straight-Line Depreciation Denominator (9.5.6) If Lessee Keeps the Leased Item then: Lessee Straight-Line Depreciation Denominator = Remaining Economic Years (9.3.15) If Lessee Returns the Leased Item then: Lessee Straight-Line Depreciation Denominator = Lease Term (9.3.2) Since Lessee Returns the Leased Item then: Lessee Straight-Line Depreciation Denominator = 5 10. Lessee Depreciation Residual Value (9.5.7) If Lessee Keeps the Leased Item then: Lessee Depreciation Residual Value = Residual Value (9.3.7) If Lessee Returns the Leased Item then: Lessee Depreciation Residual Value = Guaranteed Residual Value (9.3.8) Since Lessee Returns the Leased Item then: Lessee Depreciation Residual Value = Guaranteed Residual Value Lessee Depreciation Residual Value = 0 11. Lessee Depreciation Expense (9.5.8) Capitalized Amount (9.5.2) Lessee Depreciation Residual Value (9.5.7) Lessee Depreciation Expense = Lessee Straight-Line Depreciation Denominator (9.5.6) 100,000 0 Lessee Depreciation Expense = 5 = 20,000 Journal Entry 12/31/XX Depreciation Expense Accumulated Depreciationitem Depreciation Expense Accumulated Depreciationitem Debit (9.5.8) Debit 20,000 Credit (9.5.8) Credit 20,000

12/31/X3

12. Lease Liability Reduction, Subsequent Rent Payments (9.5.9) Lease Liability Reduction, Subsequent Rent Payments = Lease Payment (9.3.23) [Included Executory Costs (9.3.21) + Lessee Interest Expense (9.5.5)] (9.5.9) Lease Liability Reduction, Subsequent Rent Payments = 25,981.62 (2,000 + 7,601.84) = 16,379.78 13. Journal Entry, Current Lease Liability Debit Credit 12/31/XX Lease Liability (9.5.9) Current Lease Liability (9.5.9) Debit Credit 12/31/X3 Lease Liability 16,379.78 Current Lease Liability 16,379.78 Ledger Lease Liability 01/01/X3 100,000 01/01/X3 23,981.62 12/31/X3 16,379.78 balance 59,638.60 14. Reversing Entry, Current Lease Liability

154 Debit (9.5.9) Credit

CHAPTER 9. LEASE EXAMPLES

12/31/XX

Current Lease Liability Lease Liability Current Lease Liability Lease Liability

12/31/X3 Ledger

(9.5.9) Debit Credit 16,379.78 16,379.78

Lease Liability 01/01/X3 100,000 01/01/X3 23,981.62 12/31/X3 16,379.78 12/31/X3 16,379.78 balance 76,018.38 15. Year Two Rent Payment Journal Entry Journal Entry, Lessees Subsequent Rent Payments If Included Executory Costs (9.3.21) > 0 then: Debit Credit XX/01/XX Lease Liability (9.5.1) (9.5.9) Executory Expenseitem (9.3.21) Interest Payable (9.5.5) Cash (9.3.23) Debit Credit XX/01/X4 Lease Liability (9.5.1) 16,379.78 Executory Expenseitem 2,000 Interest Payable 7,601.84 Cash 25,981.62 Ledger Lease Liability 01/01/X3 100,000 01/01/X3 23,981.62 12/31/X3 16,379.78 12/31/X3 16,379.78 01/01/X4 16,379.78 balance 59,638.60

9.5

Capital Lease: Lessor

Example 73, 20X3: Lease Term = 5 years. Lease Payments = $25,981.62, due each January 1. Age of Leased Item = brand new. Fair Value of Leased Item = $100,000. Estimated Economic Life = 5 years. Estimated Residual Value = $0. Annual property taxes lessee pays to lessor to pay the government = $2,000. Item is returned at end of term. Lessors incremental borrowing rate = 10%. Prepare two years of lessors complete journal entries. Solution 73:

1. Capital Lease Rent (9.3.5) Capital Lease Rent = Lease Payment (9.3.23) Included Executory Costs (9.3.21) (9.3.5) Capital Lease Rent = 25,981,62 2,000 = 23,981.62

9.5. CAPITAL LEASE: LESSOR

155

2. Present Value Minimum Lease Payments for Lessor (9.3.13) PV Minimum Lease Payments for Lessor = Capital Lease Rent (9.3.5) pvad[$1, Lessor Interest Rate (9.3.3), Lease Term (9.3.2)] pv[Guaranteed Residual Value (9.3.8), Lessee Interest Rate, Lease Term] pv[Bargain Purchase Option (9.3.11), Lessee Interest Rate, Lease Term] pv[Third Party Guarantee (9.3.9), Lessor Interest Rate, Lease Term] pv[Bogus Failure To Renew Penalty (9.3.10), Lessee Interest Rate, Lease Term] PV Minimum Lease Payments for Lessor = 23,981.62 4.16986 + 0 = 100,000 3. Lessor Minimum Lease Payments Ratio (9.3.19) Lessor Minimum Lease Payments Ratio = (9.3.19) Lessor Minimum Lease Payments Ratio PV Minimum Lease Payments for Lessor (9.3.13) Leased Item Fair Value (9.3.6) 100,000 = 100,000 = 1.0

4. Recovery Of Investment Test If Lessor Minimum Lease Payments Ratio (9.3.19) >= 0.90 then: Capital Lease (9.3) for the Lessor (9.6). Since 1.0 >= 0.90 then Capital Lease (9.3) for the Lessor (9.6). 5. Lessor Receivable Amount (9.6.9) Lessor Receivable Amount = [Capital Lease Rent (9.3.5) Lease Term (9.3.2)] Bargain Purchase Option (9.3.11) Residual Value (9.3.7) Guaranteed Residual Value (9.3.8) Bogus Failure To Renew Penalty (9.3.10) Third Party Guarantee (9.3.9) (9.6.9) Lessor Receivable Amount = 23,981.62 5 + 0 = 119,908.10

+ + + + +

6. Lessor Unearned Interest Revenue (9.6.10) Lessor Unearned Interest Revenue = Lessor Receivable Amount (9.6.9) Leased Item Fair Value (9.3.6) (9.6.10) Lessor Unearned Interest Revenue = 119,908.10 100,000 = 19,908.10 Journal Entry Debit Credit 01/01/XX Lease Receivable (9.6.8) (9.6.9) Equipmentitem Leased Item Fair Value (9.3.6) Lessor Unearned Interest Revenue (9.6.10) Debit Credit 01/01/X3 Lease Receivable (9.6.8) 119,908.10 Equipmentitem 100,000 Lessor Unearned Interest Revenue 19,908.10 Ledgers Lease Receivable 01/01/X3 119,908.10 balance 119,908.10 Lessor Unearned Interest Revenue 01/01/X3 19,908.10 balance 19,908.10 7. Rent Receipt If Included Executory Costs (9.3.21) > 0 then:

156 Debit (9.3.23) Credit

CHAPTER 9. LEASE EXAMPLES

01/01/XX

Cash Lease Receivable (9.6.8) Executory Payableitem Cash Lease Receivable (9.6.8) Executory Payableitem

01/01/X3

(9.3.5) (9.3.21) Debit Credit 25,981,62 23,981.62 2,000

Ledger Lease Receivable 01/01/X3 119,908.10 01/01/X3 23,981.62 balance 95,926.48 8. Net Lease Receivable (9.6.13) Net Lease Receivable = Lease Receivable (9.6.8) Balance Lessor Unearned Interest Revenue (9.6.10) Balance (9.6.13) Net Lease Receivable = 95,926.48 19,908.10 = 76.018.38 9. Lessor Interest Revenue (9.6.14) Lessor Interest Revenue = Net Lease Receivable (9.6.13) Lessor Interest Rate (9.3.3) (9.6.14) Lessor Interest Revenue = 76,018.38 0.10 = 7,601.84 Journal Entry 12/31/XX Lessor Unearned Interest Revenue (9.6.10) Interest Revenue Lessor Unearned Interest Revenue (9.6.10) Interest Revenue Debit (9.6.14) Debit 7,601.84 Credit (9.6.14) Credit 7,601.84

12/31/X3 Ledger

Lessor Unearned Interest Revenue 01/01/X3 19,908.10 12/31/X3 7,601.84 balance 12,306.26 10. Rent Receipt, Year Two If Included Executory Costs (9.3.21) > 0 then: Debit Credit 01/01/XX Cash (9.3.23) Lease Receivable (9.6.8) (9.3.5) Executory Payableitem (9.3.21) Debit Credit 01/01/X4 Cash 25,981,62 Lease Receivable (9.6.8) 23,981.62 Executory Payableitem 2,000 Ledgers Lease Receivable 01/01/X3 119,908.10 01/01/X3 23,981.62 01/01/X4 23,981.62 balance 71,944.86 Ledger

9.5. CAPITAL LEASE: LESSOR Lessor Unearned Interest Revenue 01/01/X3 19,908.10 12/31/X3 7,601.84 balance 12,306.26 11. Net Lease Receivable (9.6.13) Net Lease Receivable = Lease Receivable (9.6.8) Balance Lessor Unearned Interest Revenue (9.6.10) Balance (9.6.13) Net Lease Receivable = 71,944.86 12,306.26 = 59.638.60 12. Lessor Interest Revenue (9.6.14) Lessor Interest Revenue = Net Lease Receivable (9.6.13) Lessor Interest Rate (9.3.3) (9.6.14) Lessor Interest Revenue = 59,638.60 0.10 = 5,963.86 Journal Entry 12/31/XX Lessor Unearned Interest Revenue (9.6.10) Interest Revenue Lessor Unearned Interest Revenue (9.6.10) Interest Revenue Debit (9.6.14) Debit 5,963.86 Credit (9.6.14) Credit 5,963.86

157

12/31/X4 Ledger

Lessor Unearned Interest Revenue 01/01/X3 19,908.10 12/31/X3 7,601.84 12/31/X4 5,963.86 balance 6,342.40

158

CHAPTER 9. LEASE EXAMPLES

Chapter 10

Retirement Benet Plan Examples


10.1 Dened Benet Plan: Simple

Example 74, 20X6: Beale Management has a Dened Benet Plan with the following characteristics (in Millions): Plan Assets, 01/01/X6 = $500. Projected Benet Obligation, 01/01/X6 = $480. Accumulated Benet Obligation, 12/31/X6 = $585. ( Unrealistically high) Annual Service Cost = $82. Settlement Rate = 5%. ( Unrealistically low) Plan Assets Expected Rate of Return = 9%. Actual return on plan assets = $40. Contributions = $70. Benets paid to retirees during the year = $40. Unrecognized Prior Service Cost, 01/01/X6 = $48. Prior Service Cost amortization = $8. Unrecognized Net Gain/Loss, 01/01/X6 = $80 gain. Average Remaining Service-Years Participating Employees = 15. Prepaid/Accrued Pension Cost, 01/01/X6 = $12 Accrued Cost. Projected Benet Obligation liability gain = $10. Prepare the journal entry to record the textbook pension expense and funding. Prepare the journal entry to record the additional pension liability. Solution 74: Initial Ledger Balances Plan Assets 01/01/X6 500 (10.1.9) balance 500 Projected Benet Obligation 01/01/X6 480 (10.1.5) balance 480 Unrecognized Net Gain/Loss 01/01/X6 80 (10.6.1) balance 80 Unrecognized Prior Service Cost 01/01/X6 48 (10.3.1) balance 48 Prepaid/Accrued Pension Cost 01/01/X6 12 (10.2) balance 12 1. Textbook: Populate Retained Earnings Beginning Balance (10.10.1) 159

160 Retained Earnings 01/01/X6 24 balance 24

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

2. Textbook: Close Prepaid/Accrued Pension Cost (10.10.2) Journal Entry, If Accrued Pension Cost Debit 01/01/XX Prepaid/Accrued Pension Cost (10.2) (10.2) Balance Retained Earnings Debit Credit 01/01/X6 Prepaid/Accrued Pension Cost (10.2) 12 Retained Earnings 12 Ledgers Prepaid/Accrued Pension Cost 01/01/X6 12 01/01/X6 12 (10.10.2) balance 0 Retained Earnings 01/01/X6 24 01/01/X6 12 (10.10.2) balance 12 3. Service Cost (10.1.13) 12/31/XX Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Debit (10.1.13) Debit 82

Credit (10.2) Balance

Credit

(10.1.13) Credit 82

12/31/X6 Ledgers

Pension Expense 12/31/X6 82 (10.1.13) balance 82 Projected Benet Obligation 01/01/X6 480 (10.1.5) 12/31/X6 82 (10.1.13) balance 562

4. Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation (10.1.5) Beginning Balance Settlement Rate (10.1.11 ) Interest Cost = 480 0.05 = 24 Journal Entry Debit Credit 12/31/XX Pension Expense (10.1.10) (10.1.12) Projected Benet Obligation (10.1.5) (10.1.12) Debit Credit 12/31/X6 Pension Expense (10.1.10) 24 Projected Benet Obligation (10.1.5) 24 Ledgers Pension Expense 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) balance 106

10.1. DEFINED BENEFIT PLAN: SIMPLE Projected Benet Obligation 01/01/X6 480 (10.1.5) 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) balance 586 5. Plan Assets Return (10.1.14) 12/31/XX Plan Assets (10.1.9) Pension Expense (10.1.10) Plan Assets (10.1.9) Pension Expense (10.1.10) Debit (10.1.14) Debit 40 Credit

161

(10.1.14) Credit 40

12/31/X6 Ledgers

Plan Assets 01/01/X6 500 (10.1.9) 12/31/X6 40 (10.1.14) balance 540 Pension Expense 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.14) balance 66 6. Pension Contributions (10.1.15) 12/31/XX Plan Assets (10.1.9) Cash Plan Assets (10.1.9) Cash Debit (10.1.15) Debit 70 Credit

(10.1.15) Credit 70

12/31/X6 Ledgers

Plan Assets 01/01/X6 500 (10.1.9) 12/31/X6 40 (10.1.14) 12/31/X6 70 (10.1.15) balance 610 Cash 12/31/X6 70 (10.1.15) balance 70 7. Benets Paid (10.1.16) 12/31/XX Projected Benet Obligation (10.1.5) Plan Assets (10.1.9) Projected Benet Obligation (10.1.5) Plan Assets (10.1.9) Debit (10.1.16) Debit 40 Credit

(10.1.16) Credit 40

12/31/X6 Ledgers

Plan Assets 01/01/X6 500 (10.1.9) 12/31/X6 40 (10.1.14) 12/31/X6 70 (10.1.15) 12/31/X6 40 (10.1.16) balance 570

162

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Projected Benet Obligation 01/01/X6 480 (10.1.5) 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) balance 546

8. Amortization PSC: Average Remaining Years (10.4.1) Debit Credit 12/31/XX Pension Expense (10.1.10) (10.4.1) Unrecognized Prior Service Cost (10.3.1) (10.4.1) Debit Credit 12/31/X6 Pension Expense (10.1.10) 8 Unrecognized Prior Service Cost (10.3.1) 8 Ledgers Pension Expense 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) 12/31/X6 8 (10.4.1) balance 74 Unrecognized Prior Service Cost 01/01/X6 48 (10.3.1) 01/01/X6 8 (10.4.1) balance 40 9. Plan Assets Expected Return (10.6.3) Plan Assets Expected Return = Plan Assets (10.1.9) Beginning Balance Plan Assets Expected Rate of Return (10.6.2) Plan Assets Expected Return = 500 0.09 = 45 10. Unexpected Net Gain/(Loss) (10.6.4) Unexpected Net Gain/(Loss) = Plan Assets Return (10.1.14) Plan Assets Expected Return (10.6.3) Unexpected Net Gain/(Loss) = 40 45 = -5 Journal Entry, If Unexpected Net (Loss) Debit Credit 12/31/XX Unrecognized Net Gain/Loss (10.6.1) (10.6.4) Pension Expense (10.1.10) (10.6.4) Debit Credit 12/31/X6 Unrecognized Net Gain/Loss (10.6.1) 5 Pension Expense (10.1.10) 5 Ledgers Pension Expense 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) 12/31/X6 8 (10.4.1) 12/31/X6 5 (10.6.4) balance 69 Unrecognized Net Gain/Loss 01/01/X6 80 (10.6.1) 12/31/X6 5 (10.6.4) balance 75 11. Liability Gain/(Loss) (10.6.5) Journal Entry, If Liability Gain

10.1. DEFINED BENEFIT PLAN: SIMPLE Debit (10.6.5) Debit 10 Credit (10.6.5) Credit 10

163

12/31/XX

Projected Benet Obligation (10.1.5) Unrecognized Net Gain/Loss (10.6.1) Projected Benet Obligation (10.1.5) Unrecognized Net Gain/Loss (10.6.1)

12/31/X6 Ledgers

Projected Benet Obligation 01/01/X6 480 (10.1.5) 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) 12/31/X6 10 (10.6.5) balance 536 Unrecognized Net Gain/Loss 01/01/X6 80 (10.6.1) 12/31/X6 5 (10.6.4) 12/31/X6 10 (10.6.5) balance 85 12. Projected Benet Obligation Corridor (10.6.6) Projected Benet Obligation Corridor = Projected Benet Obligation (10.1.5) Beginning Balance 0.10 Projected Benet Obligation Corridor = 480 0.10 = 48 13. Plan Assets Corridor (10.6.7) Plan Assets Corridor = Plan Assets (10.1.9) Beginning Balance 0.10 Plan Assets Corridor = 500 0.10 = 50 14. Corridor Amount (10.6.8) If Projected Benet Obligation Corridor (10.6.6) > Plan Assets Corridor (10.6.7) then: Corridor Amount = Projected Benet Obligation Corridor (10.6.6) If Plan Assets Corridor (10.6.7) > Projected Benet Obligation Corridor (10.6.6) then: Corridor Amount = Plan Assets Corridor (10.6.7) Corridor Amount = 50 15. Possible Corridor Amortization (10.6.9) Possible Corridor Amortization = Unrecognized Net Gain/Loss (10.6.1) Beginning Balance Corridor Amount (10.6.8) Possible Corridor Amortization = 80 50 = 30 16. Corridor Amortization (10.6.13) Possible Corridor Amortization (10.6.9) Average Remaining Service-Years Participating Employees (10.6.12) Corridor Amortization = 30 15 = 2 Corridor Amortization = Journal Entry, If Possible Corridor Amortization (10.6.9) > 0 then: Journal Entry, If Corridor Amount (10.6.8) = Plan Assets Corridor (10.6.7) Debit Credit 12/31/XX Unrecognized Net Gain/Loss (10.6.1) (10.6.13) Pension Expense (10.1.10) (10.6.13) Debit Credit 12/31/X6 Unrecognized Net Gain/Loss (10.6.1) 2 Pension Expense (10.1.10) 2 Ledgers

164

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Pension Expense 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) 12/31/X6 8 (10.4.1) 12/31/X6 5 (10.6.4) 12/31/X6 2 (10.6.13) balance 67 Unrecognized Net Gain/Loss 01/01/X6 80 (10.6.1) 12/31/X6 5 (10.6.4) 12/31/X6 10 (10.6.5) 12/31/X6 2 (10.6.13) balance 83

10.1. DEFINED BENEFIT PLAN: SIMPLE 17. Pension Identity Table (10.7) Assets Plan Assets (10.1.9) Unrecognized Prior Service Costs (10.3) Prepaid Pension Cost (10.2) (Cash) (10.1.15) Total Assets Liabilities Projected Benet Obligation (10.1.5) Accrued Pension Cost (10.2)

165

Total Liabilities Equity (Pension Expense) (10.1.10) Unrecognized Net Gain (10.6.1) (Unrecognized Net Loss) (10.6.1) Retained Earnings Total Equity

Pension Identity Table (10.7) Assets Plan Assets 570 Unrecognized Prior Service Costs 40 Prepaid Pension Cost 0 (Cash) (70) 540 Liabilities Projected Benet Obligation 536 Accrued Pension Cost 0

536 Equity (Pension Expense) (67) Unrecognized Net Gain 83 (Unrecognized Net Loss) 0 Retained Earnings (12) 4

18. Textbook: Calculate Prepaid/Accrued Journal Entry (10.10.5) Textbook Prepaid/Accrued = Pension Contributions (10.1.15) Pension Expense (10.1.10) ending balance Textbook Prepaid/Accrued = 70 67 = 3 Textbook Journal Entry, If Textbook Prepaid/Accrued > 0 12/31/XX Pension Expense Prepaid/Accrued Pension Cost Cash Pension Expense Prepaid/Accrued Pension Cost Cash Debit (10.1.10) Balance Textbook Prepaid/Accrued (10.10.5) Debit 67 3 Credit Credit

Pension Contributions (10.1.15)

12/31/X6

70

Note: This journal entry is the answer to the textbook problem. Do not perform this journal entry in your records. 19. Projected Benet Obligation and Plan Assets Closing Entries (10.8.1) Debit Credit 12/31/XX Projected Benet Obligation (10.1.5) (10.1.5) Ending Balance Prepaid/Accrued Pension Cost (10.2) (10.1.5) Ending Balance

166

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Debit (10.1.9) Ending Balance Debit 536 Debit 570 Credit 536 Credit 570 Credit (10.1.9) Ending Balance

12/31/XX

Prepaid/Accrued Pension Cost (10.2) Plan Assets (10.1.9) Projected Benet Obligation (10.1.5) Prepaid/Accrued Pension Cost (10.2) Prepaid/Accrued Pension Cost (10.2) Plan Assets (10.1.9)

12/31/X6

12/31/X6 Ledgers

Projected Benet Obligation 01/01/X6 480 (10.1.5) 12/31/X6 82 (10.1.13) 12/31/X6 24 (10.1.12) 12/31/X6 40 (10.1.16) 12/31/X6 10 (10.6.5) 12/31/X6 536 (10.8.1) balance 0 Plan Assets 01/01/X6 500 (10.1.9) 12/31/X6 40 (10.1.14) 12/31/X6 70 (10.1.15) 12/31/X6 40 (10.1.16) 12/31/X6 570 (10.8.1) balance 0 Prepaid/Accrued Pension Cost 01/01/X6 12 01/01/X6 12 (10.10.2) 12/31/X6 536 (10.8.1) 12/31/X6 570 (10.8.1) balance 34 20. Unrecognized Prior Service Cost Closing Entry (10.8.3) 12/31/XX Prepaid/Accrued Pension Cost (10.2) Unrecognized Prior Service Cost (10.3.1) Prepaid/Accrued Pension Cost (10.2) Unrecognized Prior Service Cost (10.3.1) Debit (10.3.1) Ending Balance Debit 40 Credit 40 Credit (10.3.1) Ending Balance

12/31/X6 Ledgers

Prepaid/Accrued Pension Cost 01/01/X6 12 01/01/X6 12 (10.10.2) 12/31/X6 536 (10.8.1) 12/31/X6 570 (10.8.1) 12/31/X6 40 (10.8.3) balance 74 Unrecognized Prior Service Cost 01/01/X6 48 (10.3.1) 01/01/X6 8 (10.4.1) 12/31/X6 40 (10.8.3) balance 0 21. Unrecognized Net Gain/Loss Closing Entry (10.8.5) Journal Entry, If Debit Balance 12/31/XX Prepaid/Accrued Pension Costs (10.2) Unrecognized Net Gain/Loss (10.6.1) Debit (10.6.1) Ending Balance Credit (10.6.1) Ending Balance

10.1. DEFINED BENEFIT PLAN: SIMPLE Journal Entry, If Credit Balance 12/31/XX Unrecognized Net Gain/Loss (10.6.1) Prepaid/Accrued Pension Costs (10.2) Unrecognized Net Gain/Loss (10.6.1) Prepaid/Accrued Pension Costs (10.2) Debit (10.6.1) Ending Balance Debit 83 Credit 83 Credit (10.6.1) Ending Balance

167

12/31/X6 Ledgers

Prepaid/Accrued Pension Cost 01/01/X6 12 01/01/X6 12 (10.10.2) 12/31/X6 536 (10.8.1) 12/31/X6 570 (10.8.1) 12/31/X6 40 (10.8.3) 12/31/X6 83 (10.8.5) balance 9 Unrecognized Net Gain/Loss 01/01/X6 80 (10.6.1) 12/31/X6 5 (10.6.4) 12/31/X6 10 (10.6.5) 12/31/X6 2 (10.6.13) 12/31/X6 83 (10.8.5) balance 0

168 22. Pension Identity Table (10.7) Assets Plan Assets (10.1.9) Unrecognized Prior Service Costs (10.3) Prepaid Pension Cost (10.2) (Cash) (10.1.15) Total Assets

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

Liabilities Projected Benet Obligation (10.1.5) Accrued Pension Cost (10.2)

Total Liabilities Equity (Pension Expense) (10.1.10) Unrecognized Net Gain (10.6.1) (Unrecognized Net Loss) (10.6.1) Retained Earnings Total Equity

Pension Identity Table (10.7) Assets Plan Assets 0 Unrecognized Prior Service Costs 0 Prepaid Pension Cost 0 (Cash) (70) (70) Liabilities Projected Benet Obligation 0 Accrued Pension Cost 9

9 Equity (Pension Expense) (67) Unrecognized Net Gain 0 (Unrecognized Net Loss) 0 Retained Earnings (12) (79)

23. Unfunded Accumulated Benet Obligation (10.9.3) Unfunded Accumulated Benet Obligation = Accumulated Benet Obligation (10.1.6) Plan Assets Ending Balance (before paid/Accrued Cost close) (10.8.1) Unfunded Accumulated Benet Obligation = 585 570 = 15

Pre-

24. Additional Pension Liability Ending Balance (10.9.4) If Prepaid/Accrued Pension Cost (10.2) Ending Balance is a credit amount then: Additional Pension Liability Ending Balance = Unfunded Accumulated Benet Obligation (10.9.3) Prepaid/Accrued Pension Cost (10.2) Ending Balance If Prepaid/Accrued Pension Cost (10.2) Ending Balance is a debit amount then: Additional Pension Liability Ending Balance = Unfunded Accumulated Benet Obligation (10.9.3) + Prepaid/Accrued Pension Cost (10.2) Ending Balance Additional Pension Liability Ending Balance = 15 9 = 6 If Additional Pension Liability Ending Balance < 0 then: Additional Pension Liability Ending Balance = 0 25. Additional Pension Liability Adjustment (10.9.5) Additional Pension Liability Adjustment = Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability (10.9.1) Beginning Balance

10.2. DEFINED BENEFIT PLAN: COMPLEX Additional Pension Liability Adjustment = 6 0 = 6 Journal Entry, If Additional Pension Liability Adjustment > 0 Debit Credit 12/31/XX Deferred Pension Cost (10.9.2) (10.9.5) Additional Pension Liability (10.9.1) (10.9.5) Debit Credit 12/31/X6 Deferred Pension Cost (10.9.2) 6 Additional Pension Liability (10.9.1) 6

169

10.2

Dened Benet Plan: Complex

Example 75, 20X6: Allied Services, Inc. has a Dened Benet Plan with the following characteristics (in Millions). Plan Assets, 01/01/X6 = $900. Projected Benet Obligation, 01/01/X6 = $875. Annual Service Cost = $31. Settlement Rate = 8%. Plan Assets Expected Rate of Return = 8%. Actual return on plan assets = $90. Contributions = $16. Benets paid to retirees during the year = $22. Prior Service Grant, 01/01/X6 = $75. Average Remaining Service-Years Participating Employees = 15. Unrecognized Net Gain/Loss Beginning Balance = $13 loss. Projected Benet Obligation liability loss = $10. What is the Pension Expense? What is the Projected Benet Obligation 12/31/X6 Balance before closing. What is the Plan Assets 12/31/X6 Balance before closing. What is the Prepaid/Accrued Pension Cost balance to be reported on the balance sheet? Solution 75: Initial Ledger Balances Plan Assets 01/01/X6 900 (10.1.9) balance 900 Projected Benet Obligation 01/01/X6 875 (10.1.5) balance 875 Unrecognized Net Gain/Loss 01/01/X6 13 (10.6.1) balance 13 1. Prior Service Grants (10.3) 01/01/XX Unrecognized Prior Service Cost (10.3.1) Projected Benet Obligation (10.1.5) Unrecognized Prior Service Cost (10.3.1) Projected Benet Obligation (10.1.5) Debit (10.3) Debit 75 Credit (10.3) Credit 75

01/01/X6 Ledgers

Unrecognized Prior Service Cost 01/01/X6 75 (10.3) balance 75

170

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Projected Benet Obligation 01/01/X6 875 (10.1.5) 01/01/X6 75 (10.3) balance 950

2. Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation (10.1.5) Beginning Balance Settlement Rate (10.1.11 ) Interest Cost = 950 0.08 = 76 Journal Entry 12/31/XX Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Debit (10.1.12) Debit 76 Credit

(10.1.12) Credit 76

12/31/X6

Ledger Balances Pension Expense 12/31/X6 76 (10.1.12) balance 76 Projected Benet Obligation 01/01/X6 875 (10.1.5) 01/01/X6 75 (10.3) 12/31/X6 76 (10.1.12) balance 1026 3. Service Cost (10.1.13) 12/31/XX Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Pension Expense (10.1.10) Projected Benet Obligation (10.1.5) Debit (10.1.13) Debit 31 Credit

(10.1.13) Credit 31

12/31/X6

Ledger Balances Pension Expense 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) balance 107 Projected Benet Obligation 01/01/X6 875 (10.1.5) 01/01/X6 75 (10.3) 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) balance 1057 4. Plan Assets Return (10.1.14) Journal Entry, If Increase 12/31/XX Plan Assets (10.1.9) Pension Expense (10.1.10) Plan Assets (10.1.9) Pension Expense (10.1.10) Debit (10.1.14) Debit 90 Credit

(10.1.14) Credit 90

12/31/X6

Ledger Balances

10.2. DEFINED BENEFIT PLAN: COMPLEX Plan Assets 01/01/X6 900 (10.1.9) 12/31/X6 90 (10.1.9) balance 990 Pension Expense 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) 12/31/X6 90 (10.1.14) balance 17 5. Pension Contributions (10.1.15) 12/31/XX Plan Assets (10.1.9) Cash Plan Assets (10.1.9) Cash Debit (10.1.15) Debit 16 Credit

171

(10.1.15) Credit 16

12/31/X6

Ledger Balance Plan Assets 01/01/X6 900 (10.1.9) 12/31/X6 90 (10.1.9) 12/31/X6 16 (10.1.15) balance 1006 6. Benets Paid (10.1.16) 12/31/XX Projected Benet Obligation (10.1.5) Plan Assets (10.1.9) Projected Benet Obligation (10.1.5) Plan Assets (10.1.9) Debit (10.1.16) Debit 22 Credit

(10.1.16) Credit 22

12/31/X6

Ledger Balances Projected Benet Obligation 01/01/X6 875 (10.1.5) 01/01/X6 75 (10.3) 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) 12/31/X6 22 (10.1.16) balance 1035 Plan Assets 01/01/X6 900 (10.1.9) 12/31/X6 90 (10.1.9) 12/31/X6 16 (10.1.15) 12/31/X6 22 (10.1.16) balance 984 Plan Assets 12/31/X6 Balance = $984 7. Amorization Using Average Remaining Years (10.4.1) Amortization Using Average Remaining Years = Prior Service Grants (10.3) Average Remaining Service-Years Participating Employees (10.6.12) Amortization Using Average Remaining Years = 75 15 = 5 Journal Entry 12/31/XX Pension Expense (10.1.10) Unrecognized Prior Service Cost (10.3.1) Debit (10.4.1) Credit (10.4.1)

172

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Debit 5 Credit 5

12/31/X6

Pension Expense (10.1.10) Unrecognized Prior Service Cost (10.3.1) Pension Expense

Ledger Balances 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) 12/31/X6 90 (10.1.14) 12/31/X6 5 (10.4.1) balance 22 Unrecognized Prior Service Cost 01/01/X6 75 (10.3) 12/31/X6 5 (10.3) balance 70 8. Plan Assets Expected Return (10.6.3) Plan Assets Expected Return = Plan Assets (10.1.9) Beginning Balance Plan Assets Expected Rate of Return (10.6.2) Plan Assets Expected Return = 900 0.08 = 72 9. Unexpected Net Gain/(Loss) (10.6.4) Unexpected Net Gain/(Loss) = Plan Assets Return (10.1.14) Plan Assets Expected Return (10.6.3) Unexpected Net Gain/(Loss) = 90 72 = 18 Journal Entry, If Unexpected Net Gain 12/31/XX Debit Pension Expense (10.1.10) (10.6.4) Unrecognized Net Gain/Loss (10.6.1) Debit Credit Pension Expense (10.1.10) 18 Unrecognized Net Gain/Loss 18 Pension Expense 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) 12/31/X6 90 (10.1.14) 12/31/X6 5 (10.4.1) 12/31/X6 18 (10.6.4) balance 40 Pension Expense = $40 Unrecognized Net Gain/Loss 01/01/X6 13 (10.6.1) 12/31/X6 18 (10.6.4) balance 5 10. Liability Gain/(Loss) (10.6.5) Journal Entry, If Liability (Loss) 12/31/XX Unrecognized Net Gain/Loss (10.6.1) Projected Benet Obligation (10.1.5) Unrecognized Net Gain/Loss (10.6.1) Projected Benet Obligation (10.1.5) Debit (10.6.5) Debit 10 Credit (10.6.5) Credit 10 Credit (10.6.4)

12/31/X6

Ledger Balances

12/31/X6

Ledger Balances

10.2. DEFINED BENEFIT PLAN: COMPLEX Unrecognized Net Gain/Loss 01/01/X6 13 (10.6.1) 12/31/X6 18 (10.6.4) 12/31/X6 10 (10.6.5) balance 5 Projected Benet Obligation 01/01/X6 875 (10.1.5) 01/01/X6 75 (10.3) 12/31/X6 76 (10.1.12) 12/31/X6 31 (10.1.13) 12/31/X6 22 (10.1.16) 12/31/X6 10 (10.6.5) balance 1045 Projected Benet Obligation 12/31/X6 Balance = $1045 11. Projected Benet Obligation Corridor (10.6.6) Projected Benet Obligation Corridor = Projected Benet Obligation (10.1.5) Beginning Balance 0.10 Projected Benet Obligation Corridor = 875 0.10 = 87.5 12. Plan Assets Corridor (10.6.7) Plan Assets Corridor = Plan Assets (10.1.9) Beginning Balance 0.10 Plan Assets Corridor = 900 0.10 = 90 13. Corridor Amount (10.6.8) If Projected Benet Obligation Corridor (10.6.6) > Plan Assets Corridor (10.6.7) then: Corridor Amount = Projected Benet Obligation Corridor (10.6.6) If Plan Assets Corridor (10.6.7) > Projected Benet Obligation Corridor (10.6.6) then: Corridor Amount = Plan Assets Corridor (10.6.7) Since Plan Assets Corridor ($90) > Projected Benet Obligation Corridor ($87.5) then: Corridor Amount = Plan Assets Corridor ($90) 14. Possible Corridor Amortization (10.6.9) Possible Corridor Amortization = Unrecognized Net Gain/Loss (10.6.1) Beginning Balance Corridor Amount (10.6.8) Possible Corridor Amortization = 13 90 = -77 Since Possible Corridor Amortization < 0 then Smoothing Gains and Losses (10.6) is complete. 15. Projected Benet Obligation and Plan Assets Closing Entries (10.8.1) Debit 12/31/XX Projected Benet Obligation (10.1.5) (10.1.5) Ending Balance Prepaid/Accrued Pension Cost (10.2) (10.1.5) Ending Debit Credit 12/31/X6 Projected Benet Obligation (10.1.5) 1045 Prepaid/Accrued Pension Cost (10.2) 1045 Debit 12/31/XX Prepaid/Accrued Pension Cost (10.2) (10.1.9) Ending Balance Plan Assets (10.1.9) (10.1.9) Ending Debit Credit 12/31/X6 Prepaid/Accrued Pension Cost (10.2) 984 Plan Assets (10.1.9) 984 Ledger Prepaid/Accrued Pension Cost 12/31/X6 1045 (10.1.5) 12/31/X6 984 (10.1.9) balance 61 Credit Balance

173

Credit Balance

174

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

16. Unrecognized Prior Service Cost Closing Entry (10.8.3) 12/31/XX Prepaid/Accrued Pension Cost (10.2) Unrecognized Prior Service Cost (10.3.1) Prepaid/Accrued Pension Cost (10.2) Unrecognized Prior Service Cost (10.3.1) Debit (10.3.1) Ending Balance Debit 70 Credit 70 Credit (10.3.1) Ending Balance

12/31/X6 Ledger

Prepaid/Accrued Pension Cost 12/31/X6 1045 (10.1.5) 12/31/X6 984 (10.1.9) 12/31/X6 70 (10.3.1) balance 9 17. Unrecognized Net Gain/Loss Closing Entry (10.8.5) Journal Entry, If Debit Balance 12/31/XX Prepaid/Accrued Pension Costs (10.2) Unrecognized Net Gain/Loss (10.6.1) Prepaid/Accrued Pension Costs (10.2) Unrecognized Net Gain/Loss (10.6.1) Debit (10.6.1) Ending Balance Debit 5 Credit 5 Credit (10.6.1) Ending Balance

12/31/X6 Ledger

Prepaid/Accrued Pension Cost 12/31/X6 1045 (10.1.5) 12/31/X6 984 (10.1.9) 12/31/X6 70 (10.3.1) 12/31/X6 5 (10.6.1) balance 14 Report Prepaid/Accrued Pension Cost balance = $14 Prepaid Pension Asset.

10.3

Dened Benet Plan: 20X3

Example 76, 20X3: Plan Assets, 01/01/X3 = $100,000. Projected Benet Obligation, 01/01/X3 = $100,000. Annual Service Cost = $9,000. Settlement Rate = 10%. Actual return on plan assets = $10,000. Contributions = $8,000. Benets paid to retirees during the year = $7,000. What is the Pension Expense? What is the Prepaid/Accrued Pension Cost Balance? Solution 76: Initial Ledger Balances Plan Assets 01/01/X3 100,000 (10.1.9) balance 100,000 Projected Benet Obligation 01/01/X3 100,000 (10.1.5) balance 100,000

10.3. DEFINED BENEFIT PLAN: 20X3 1. Journal Entry for Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation (10.1.5) Settlement Rate (10.1.11) (10.1.12) Interest Cost = 100,000 (10.1.5) 0.10 (10.1.11) = 10,000 Journal Entry 12/31/XX Ledgers Pension Expense 12/31/X3 10,000 (10.1.12) balance 10,000 Projected Benet Obligation 01/01/X3 100,000 12/31/X3 10,000 (10.1.12) balance 110,000 2. Journal Entry for Service Cost 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.13) Debit 9,000 Credit (10.1.13) Credit 9,000 Pension Expense Projected Benet Obligation Debit 10,000 (10.1.12) Credit 10,000 (10.1.12)

175

12/31/X3 Ledgers

Pension Expense 12/31/X3 10,000 (10.1.12) 12/31/X3 9,000 (10.1.13) balance 19,000 Projected Benet Obligation 01/01/X3 100,000 12/31/X3 10,000 (10.1.12) 12/31/X3 9,000 (10.1.13) balance 119,000 3. Journal Entry for Plan Assets Increase Debit Credit 12/31/XX Plan Assets (10.1.14) Pension Expense (10.1.14) 12/31/X3 Ledgers Pension Expense 12/31/X3 10,000 (10.1.12) 12/31/X3 9,000 (10.1.13) 12/31/X3 10,000 (10.1.14) balance 9,000 Pension Expense = $9,000. Plan Assets Pension Expense Debit 10,000 Credit 10,000

176 Plan Assets 01/01/X3 100,000 (10.1.9) 12/31/X3 10,000 (10.1.14) balance 110,000 4. Journal Entry for Contributions Debit 12/31/XX Plan Assets (10.1.15) Cash 12/31/X3 Ledger Plan Assets 01/01/X3 100,000 (10.1.9) 12/31/X3 10,000 (10.1.14) 12/31/X3 8,000 (10.1.15) balance 118,000 5. Journal Entry for Benets Paid 12/31/XX Projected Benet Obligation Plan Assets Projected Benet Obligation Plan Assets Plan Assets 01/01/X3 100,000 (10.1.9) 12/31/X3 10,000 (10.1.14) 12/31/X3 8,000 (10.1.15) 12/31/X3 balance 111,000 Plan Assets Cash Debit 8,000

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

Credit (10.1.15)

Credit 8,000

Debit (10.1.16) Debit 7,000

Credit (10.1.16)

Credit 7,000

12/31/X3 Ledgers

7,000 (10.1.16)

Projected Benet Obligation 01/01/X3 100,000 12/31/X3 10,000 (10.1.12) 12/31/X3 9,000 (10.1.13) 12/31/X3 7,000 (10.1.16) balance 112,000 6. Closing Journal Entries Closing Journal Entry For Projected Benet Obligation 12/31/XX Projected Benet Obligation Prepaid/Accrued Pension Cost Projected Benet Obligation Prepaid/Accrued Pension Cost Debit (10.1.5) Ending Balance Debit 112,000 Credit 112,000 Debit (10.1.9) Ending Balance Credit (10.1.9) Ending Balance Credit (10.1.5) Ending Balance

12/31/X3

Closing Journal Entry For Plan Assets 12/31/XX Prepaid/Accrued Pension Cost Plan Assets

10.4. DEFINED BENEFIT PLAN: 20X4 Debit 111,000 Credit 111,000

177

12/31/X3 Ledger

Prepaid/Accrued Pension Cost Plan Assets

Prepaid/Accrued Pension Cost 12/31/X3 112,000 (10.1.5) 12/31/X3 111,000 (10.1.9) balance 1,000 Prepaid/Accrued Pension Cost = $1,000 Accrued Pension Cost. 7. Reversing Journal Entries Reversing Journal Entry For Projected Benet Obligation Debit 12/31/XX Prepaid/Accrued Pension Cost (10.1.5) Ending Balance Projected Benet Obligation 12/31/X3 Prepaid/Accrued Pension Cost Projected Benet Obligation Debit 112,000 Credit 112,000 Debit (10.1.9) Ending Balance Debit 111,000 Credit 111,000 Credit (10.1.9) Ending Balance

Credit (10.1.5) Ending Balance

Reversing Journal Entry For Plan Assets 12/31/XX Plan Assets Prepaid/Accrued Pension Cost Plan Assets Prepaid/Accrued Pension Cost

12/31/X3 Ledger

Prepaid/Accrued Pension Cost 12/31/X3 112,000 (10.1.5) 12/31/X3 111,000 (10.1.9) 12/31/X3 112,000 (10.1.5) 12/31/X3 111,000 (10.1.9) balance 0

10.4

Dened Benet Plan: 20X4

Example 77, 20X4: Projected Benet Obligation, 01/01/X4 = $112,000. Plan Assets, 01/01/X4 = $111,100. Prior Service Grant, 01/01/X4 = $80,000. Accumulated Benet Obligation, 12/31/X4 = $164,000. Annual Service Cost = $9,500. Settlement Rate = 10%. Actual return on plan assets = $11,100. Contributions = $20,000. Benets paid to retirees during the year = $8,000. Prior Service Grant, 01/01/X4 = $80,000. Amortization of Prior Service Cost = $27,200. What is the Pension Expense? What is the Prepaid/Accrued Pension Cost Balance? What is the Deferred Pension Cost Ending Balance? What is the Additional Pension Liability Ending Balance? Solution 77:

178 Initial Ledger Balances Plan Assets 01/01/X4 111,000 (10.1.9) balance 111,000

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

Projected Benet Obligation 01/01/X4 112,000 (10.1.5) balance 112,000 1. Journal Entry for Prior Service Grant 01/01/XX Unrecognized Prior Service Cost Projected Benet Obligation Unrecognized Prior Service Cost Projected Benet Obligation Debit (10.3.1) Debit 80,000 Credit (10.3.1) Credit 80,000

01/01/X4 Ledgers

Unrecognized Prior Service Cost 01/01/X4 80,000 (10.3.1) balance 80,000 Projected Benet Obligation 01/01/X4 112,000 (10.1.5) 01/01/X4 80,000 (10.3.1) new beginning balance 192,000 2. Journal Entry for Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation Beginning Balance (10.1.5) Settlement Rate (10.1.11) (10.1.12) Interest Cost = 192,000 (10.1.5) 0.10 (10.1.11) = 19,200 Journal Entry 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.12) Debit 19,200 Credit (10.1.12) Credit 19,200

12/31/X4 Ledgers

Pension Expense 12/31/X4 11,200 (10.1.12) balance 19,200 Projected Benet Obligation 01/01/X4 112,000 01/01/X4 80,000 (10.3.1) 12/31/X4 19,200 (10.1.12) balance 211,200 3. Journal Entry for Service Cost 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.13) Debit 9,500 Credit (10.1.13) Credit 9,500

12/31/X4

10.4. DEFINED BENEFIT PLAN: 20X4 Ledgers Pension Expense 12/31/X4 19,200 (10.1.12) 12/31/X4 9,500 (10.1.13) balance 28,700 Projected Benet Obligation 01/01/X4 112,000 01/01/X4 80,000 (10.3.1 12/31/X4 19,200 (10.1.12) 12/31/X4 9,500 (10.1.13) balance 220,700 4. Journal Entry for Plan Assets Increase Debit Credit 12/31/XX Plan Assets (10.1.14) Pension Expense (10.1.14) 12/31/X4 Ledgers Pension Expense 12/31/X4 19,200 (10.1.12) 12/31/X4 9,500 (10.1.13) 12/31/X4 11,100 (10.1.14) balance 17,600 Plan Assets 01/01/X4 111,000 (10.1.9) 12/31/X4 11,100 (10.1.14) balance 122,100 5. Journal Entry for Contributions Debit 12/31/XX Plan Assets (10.1.15) Cash 12/31/X4 Ledger Plan Assets 01/01/X4 111,000 (10.1.9) 12/31/X4 11,100 (10.1.14) 12/31/X4 20,000 (10.1.15) balance 142,100 6. Journal Entry for Benets Paid 12/31/XX Projected Benet Obligation Plan Assets Projected Benet Obligation Plan Assets Debit (10.1.16) Debit 8,000 Credit (10.1.16) Credit 8,000 Plan Assets Cash Debit 20,000 Plan Assets Pension Expense Debit 11,100 Credit 11,100

179

Credit (10.1.15)

Credit 20,000

12/31/X4 Ledgers

180 Plan Assets 01/01/X4 111,000 (10.1.9) 12/31/X4 11,100 (10.1.14) 12/31/X4 20,000 (10.1.15)

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

12/31/X4 8,000 (10.1.16) balance 134,100 Projected Benet Obligation 01/01/X4 112,000 01/01/X4 80,000 (10.3.1 12/31/X4 19,200 (10.1.12) 12/31/X4 9,500 (10.1.13) 12/31/X4 8,000 (10.1.16) balance 212,700 7. Projected Benet Obligation Corridor (10.6.6) Projected Benet Obligation Corridor = Projected Benet Obligation Beginning Balance (10.1.5) 0.10 (10.6.6) Projected Benet Obligation Corridor = 212,700 0.10 = 21,270 8. Plan Assets Corridor (10.6.7) Plan Assets Corridor = Plan Assets Beginning Balance (10.1.9) 0.10 (10.6.7) Plan Assets Corridor = 134,100 0.10 = 13,410 9. Corridor Amount If Projected Benet Obligation Corridor (10.6.6) > Plan Assets Corridor (10.6.7) then: (10.6.8) Corridor Amount = Projected Benet Obligation Corridor (10.6.6) If Plan Assets Corridor (10.6.7) > Projected Benet Obligation Corridor (10.6.6) then: (10.6.8) Corridor Amount = Plan Assets Corridor (10.6.7) (10.6.8) Corridor Amount = 21,270 10. Possible Corridor Amortization (10.6.9) Possible Corridor Amortization = Unrecognized Net Gain/Loss Beginning Balance (10.6.1) Corridor Amount (10.6.8) (10.6.9) Possible Corridor Amortization = 0 21,270 = -21,270 Since Possible Corridor Amortization < 0 then Smoothing Gains and Losses (10.6) is complete. 11. Journal Entry, Amortization for Unrecognized Prior Service Cost Debit (10.5.7) Debit 27,200 Credit (10.5.7) Credit 27,200

12/31/XX

Pension Expense Unrecognized Prior Service Cost Pension Expense Unrecognized Prior Service Cost Pension Expense

12/31/X4 Ledgers

12/31/X4 19,200 (10.1.12) 12/31/X4 9,500 (10.1.13) 12/31/X4 11,100 (10.1.14) 12/31/X4 27,200 (10.5.7) balance 44,800

10.4. DEFINED BENEFIT PLAN: 20X4 Pension Expense = $44,800. Unrecognized Prior Service Cost 01/01/X4 80,000 (10.3.1) 12/31/X4 27,200 (10.5.7) balance 52,800 12. Closing Journal Entries Closing Journal Entry For Projected Benet Obligation 12/31/XX Projected Benet Obligation Prepaid/Accrued Pension Cost Projected Benet Obligation Prepaid/Accrued Pension Cost Debit (10.1.5) Ending Balance Debit 212,700 Credit 212,700 Debit (10.1.9) Ending Balance Credit (10.1.9) Ending Balance Credit (10.1.5) Ending Balance

181

12/31/X4

Closing Journal Entry For Plan Assets 12/31/XX Prepaid/Accrued Pension Cost Plan Assets

Debit Credit Prepaid/Accrued Pension Cost 134,100 Plan Assets 134,100 Closing Journal Entry For Unrecognized Prior Service Cost Debit 12/31/XX Prepaid/Accrued Pension Cost (10.3.1) Ending Balance Unrecognized Prior Service Cost 12/31/X4 12/31/X4 Ledger Prepaid/Accrued Pension Cost 12/31/X4 212,700 (10.1.5) 12/31/X4 134,100 (10.1.9) 12/31/X4 52,800 (10.3.1) balance 25,800 Prepaid/Accrued Pension Cost = $25,800 Accrued Pension Cost Prepaid/Accrued Pension Cost Unrecognized Prior Service Cost Debit 52,800 Credit 52,800

Credit (10.3.1) Ending Balance

Minimum Liability
13. Unfunded Accumulated Benet Obligation (10.9.3) Unfunded Accumulated Benet Obligation = Accumulated Benet Obligation (10.1.6) Plan Assets Ending Balance (before paid/Accrued Pension Cost close) (10.1.9) (10.9.3) Unfunded Accumulated Benet Obligation = 164,000 134,100 = 29,900 14. Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability Ending Balance = Unfunded Accumulated Benet Obligation (10.9.3) Prepaid/Accrued Pension Cost Ending Balance (10.2) (10.9.4) Additional Pension Liability Ending Balance = 29,900 25,800 = 4,100 15. Additional Pension Liability Adjustment (10.9.5) Additional Pension Liability Adjustment = Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability Beginning Balance (10.9.1) (10.9.5) Additional Pension Liability Adjustment = 4,100 0 = 4,100 Pre-

182

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

16. Journal Entry, If Additional Pension Liability Adjustment > 0 Debit Credit 12/31/XX Deferred Pension Cost (10.9.2) (10.9.5) Additional Pension Liability (10.9.1) (10.9.5) Debit Credit 12/31/X4 Deferred Pension Cost (10.9.2) 4,100 Additional Pension Liability (10.9.1) 4,100 Ledgers Deferred Pension Cost 12/31/X4 4,100 (10.9.5) balance 4,100 Additional Pension Liability 12/31/X4 4,100 (10.9.5) balance 4,100 17. Reversing Journal Entries Reversing Journal Entry For Projected Benet Obligation Debit 12/31/XX Prepaid/Accrued Pension Cost (10.1.5) Ending Balance Projected Benet Obligation 12/31/X4 Prepaid/Accrued Pension Cost Projected Benet Obligation Debit 212,700 Credit 212,700 Debit (10.1.9) Ending Balance Debit 134,100 Credit 134,100 Credit (10.3.1) Ending Balance Credit (10.1.9) Ending Balance

Credit (10.1.5) Ending Balance

Reversing Journal Entry For Plan Assets 12/31/XX Plan Assets Prepaid/Accrued Pension Cost Plan Assets Prepaid/Accrued Pension Cost

12/31/X4

Reversing Journal Entry For Unrecognized Prior Service Cost Debit 12/31/XX Unrecognized Prior Service Cost (10.3.1) Ending Balance Prepaid/Accrued Pension Cost 12/31/X4 Ledger Prepaid/Accrued Pension Cost 12/31/X4 212,700 (10.1.5) 12/31/X4 134,100 (10.1.9) 12/31/X4 52,800 (10.3.1) 12/31/X4 212,700 (10.1.5) 12/31/X4 134,100 (10.1.9) 12/31/X4 52,800 (10.3.1) balance 0 Unrecognized Prior Service Cost Prepaid/Accrued Pension Cost Debit 52,800 Credit 52,800

10.5

Dened Benet Plan: 20X5

Example 78, 20X5: Plan Assets, 01/01/X5 = $134,100. Projected Benet Obligation, 01/01/X5 = $212,700.

10.5. DEFINED BENEFIT PLAN: 20X5 Accumulated Benet Obligation, 12/31/X5 = $240,600. Additional Pension Liability, 01/01/X5 = $4,100. Deferred Pension Cost, 01/01/X5 = $4,100. Annual Service Cost = $13,000. Settlement Rate = 10%. Assets Expected Rate = 10%. Actual return on plan assets = $12,000. Contributions = $24,000. Benets paid to retirees during the year = $10,500. Unrecognized Prior Service Cost, 01/01/X5 = $52,800. Amortization of Prior Service Cost = $20,800. Liability Loss = $28,530. What is the Pension Expense? What is the Prepaid/Accrued Pension Cost Balance? What is the Additional Pension Liability Ending Balance? What is the Deferred Pension Cost Ending Balance? What is the Excess of Additional Liability Over Unrecognized Pension Service Cost? Solution 78: Initial Ledger Balances Plan Assets 01/01/X5 134,100 (10.1.9) balance 134,100 Projected Benet Obligation 01/01/X5 212,700 (10.1.5) balance 212,700 Unrecognized Prior Service Cost 01/01/X5 52,800 (10.3.1) balance 52,800 Additional Pension Liability 01/01/X5 4,100 (10.9.1) balance 4,100 Deferred Pension Cost 01/01/X5 4,100 (10.9.2) balance 4,100 1. Journal Entry for Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation (10.1.5) Settlement Rate (10.1.11) (10.1.12) Interest Cost = 212,700 (10.1.5) 0.10 (10.1.11) = 21,270 Journal Entry 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.12) Debit 21,270 Credit (10.1.12) Credit 21,270

183

12/31/X5 Ledgers

Pension Expense 12/31/X5 21,270 (10.1.12) balance 21,270

184

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Projected Benet Obligation 01/01/X5 212,700 12/31/X5 21,270 (10.1.12) balance 233,970

2. Journal Entry for Service Cost 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.13) Debit 13,000 Credit (10.1.13) Credit 13,000

12/31/X5 Ledgers

Pension Expense 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) balance 34,270 Projected Benet Obligation 01/01/X5 212,700 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) balance 246,970 3. Journal Entry for Plan Assets Increase Debit Credit 12/31/XX Plan Assets (10.1.14) Pension Expense (10.1.14) 12/31/X5 Ledgers Pension Expense 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) 12/31/X5 12,000 (10.1.14) balance 22,270 Plan Assets 01/01/X5 134,100 (10.1.9) 12/31/X5 12,000 (10.1.14) balance 146,100 4. (10.6.3) Plan Assets Expected Return = Plan Assets (10.1.9) Beginning Balance Plan Assets Expected Rate of Return (10.6.2) (10.6.3) Plan Assets Expected Return = 134,100 0.10 = 13,410 5. Journal Entry for Unexpected Net Gain/Loss (10.6.4) Unexpected Net Gain/(Loss) = Plan Assets Return (10.1.14) Plan Assets Expected Return (10.6.3) (10.6.4) Unexpected Net Gain/(Loss) = 12,000 13,410 = (1,410) Plan Assets Pension Expense Debit 12,000 Credit 12,000

10.5. DEFINED BENEFIT PLAN: 20X5 Journal Entry, If Unexpected Net (Loss) 12/31/XX Unrecognized Net Gain/Loss Pension Expense Unrecognized Net Gain/Loss Pension Expense Debit (10.6.4) Debit 1,410 Credit (10.6.4) Credit 1,410

185

12/31/X5 Ledgers

Pension Expense 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) 12/31/X5 12,000 (10.1.14) 12/31/X5 1,410 (10.6.4) balance 20,860 Unrecognized Net Gain/Loss 12/31/X5 1,410 (10.6.4) balance 1,410 6. Journal Entry, If Liability (Loss) 12/31/XX Unrecognized Net Gain/Loss Projected Benet Obligation Unrecognized Net Gain/Loss Projected Benet Obligation Debit (10.6.5) Debit 28,530 Credit (10.6.5) Credit 28,530

12/31/X5 Ledgers

Projected Benet Obligation 01/01/X5 212,700 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) 12/31/X5 28,530 (10.6.5) balance 275,500 Unrecognized Net Gain/Loss 12/31/X5 1,410 (10.6.4) 12/31/X5 28,530 (10.6.5) balance 29,940 7. Journal Entry for Contributions Debit 12/31/XX Plan Assets (10.1.15) Cash 12/31/X5 Ledger Plan Assets 01/01/X5 134,100 (10.1.9) 12/31/X5 12,000 (10.1.14) 12/31/X5 24,000 (10.1.15) balance 170,100 8. Journal Entry for Benets Paid Plan Assets Cash Debit 24,000

Credit (10.1.15)

Credit 24,000

186

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Debit (10.1.16) Debit 10,500 Credit (10.1.16) Credit 10,500

12/31/XX

Projected Benet Obligation Plan Assets Projected Benet Obligation Plan Assets Plan Assets

12/31/X5 Ledgers

01/01/X5 134,100 (10.1.9) 12/31/X5 12,000 (10.1.14) 12/31/X5 24,000 (10.1.15) 12/31/X5 10,500 (10.1.16) balance 159,600 Projected Benet Obligation 01/01/X5 212,700 12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) 12/31/X5 28,530 (10.6.5) 12/31/X5 10,500 (10.1.16) balance 265,000 9. Journal Entry, Amortization for Unrecognized Prior Service Cost Debit (10.5.7) Debit 20,800 Credit (10.5.7) Credit 20,800

12/31/XX

Pension Expense Unrecognized Prior Service Cost Pension Expense Unrecognized Prior Service Cost Pension Expense

12/31/X5 Ledgers

12/31/X5 21,270 (10.1.12) 12/31/X5 13,000 (10.1.13) 12/31/X5 12,000 (10.1.14) 12/31/X5 1,410 (10.6.4) 12/31/X5 20,800 (10.5.7) balance 41,660 Pension Expense = $41,660. Unrecognized Prior Service Cost 01/01/X5 52,800 (10.3.1) 12/31/X5 20,800 (10.5.7) balance 32,000 10. Projected Benet Obligation Corridor (10.6.6) Projected Benet Obligation Corridor = Projected Benet Obligation Beginning Balance (10.1.5) 0.10 (10.6.6) Projected Benet Obligation Corridor = 212,700 0.10 = 21,270 11. Plan Assets Corridor (10.6.7) Plan Assets Corridor = Plan Assets Beginning Balance (10.1.9) 0.10 (10.6.7) Plan Assets Corridor = 134,100 0.10 = 13,410

10.5. DEFINED BENEFIT PLAN: 20X5 12. Corridor Amount If Projected Benet Obligation Corridor (10.6.6) > Plan Assets Corridor (10.6.7) then: (10.6.8) Corridor Amount = Projected Benet Obligation Corridor (10.6.6) If Plan Assets Corridor (10.6.7) > Projected Benet Obligation Corridor (10.6.6) then: (10.6.8) Corridor Amount = Plan Assets Corridor (10.6.7) (10.6.8) Corridor Amount = 21,270 13. Possible Corridor Amortization (10.6.9) Possible Corridor Amortization = Unrecognized Net Gain/Loss (10.6.1) Beginning Balance Corridor Amount (10.6.8) (10.6.9) Possible Corridor Amortization = 0 21,270 = -21,270 Since Possible Corridor Amortization < 0 then Smoothing Gains and Losses (10.6) is complete. 14. Closing Journal Entries Closing Journal Entry For Projected Benet Obligation 12/31/XX Projected Benet Obligation Prepaid/Accrued Pension Cost Projected Benet Obligation Prepaid/Accrued Pension Cost Debit (10.1.5) Ending Balance Debit 265,000 Credit 265,000 Debit (10.1.9) Ending Balance Debit 159,600 Credit 159,600 Credit (10.3.1) Ending Balance Credit (10.1.9) Ending Balance Credit (10.1.5) Ending Balance

187

12/31/X5

Closing Journal Entry For Plan Assets 12/31/XX Prepaid/Accrued Pension Cost Plan Assets Prepaid/Accrued Pension Cost Plan Assets

12/31/X5

Closing Journal Entry For Unrecognized Prior Service Cost Debit 12/31/XX Prepaid/Accrued Pension Cost (10.3.1) Ending Balance Unrecognized Prior Service Cost 12/31/X5 Prepaid/Accrued Pension Cost Unrecognized Prior Service Cost Debit 32,000 Credit 32,000 Debit (10.6.1) Ending Balance Debit 29,940 Credit 29,940

Closing Journal Entry For Unrecognized Net Gain/Loss Credit (10.6.1) Ending Balance 12/31/XX Prepaid/Accrued Pension Cost Unrecognized Net Gain/Loss Prepaid/Accrued Pension Cost Unrecognized Net Gain/Loss

12/31/X5 Ledger

Prepaid/Accrued Pension Cost 12/31/X5 265,000 (10.1.5) 12/31/X5 159,600 (10.1.9) 12/31/X5 32,000 (10.3.1) 12/31/X5 29,940 (10.6.1) balance 43,460 Prepaid/Accrued Pension Cost = $43,460 Accrued Pension Cost.

Minimum Liability

188

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

15. Unfunded Accumulated Benet Obligation (10.9.3) Unfunded Accumulated Benet Obligation = Accumulated Benet Obligation (10.1.6) Plan Assets Ending Balance (before paid/Accrued Pension Cost close) (10.1.9) (10.9.3) Unfunded Accumulated Benet Obligation = 240,600 159,600 = 81,000

Pre-

16. Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability Ending Balance = Unfunded Accumulated Benet Obligation (10.9.3) Prepaid/Accrued Pension Cost Ending Balance (10.2) (10.9.4) Additional Pension Liability Ending Balance = 81,000 43,460 = 37,540 17. Additional Pension Liability Adjustment (10.9.5) Additional Pension Liability Adjustment = Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability Beginning Balance (10.9.1) (10.9.5) Additional Pension Liability Adjustment = 37,540 4,100 = 33,440 18. Journal Entry, If Additional Pension Liability Adjustment > 0 Debit Credit 12/31/XX Deferred Pension Cost (10.9.2) (10.9.5) Additional Pension Liability (10.9.1) (10.9.5) Debit Credit 12/31/X5 Deferred Pension Cost (10.9.2) 33,440 Additional Pension Liability (10.9.1) 33,440 Ledgers Deferred Pension Cost 01/01/X5 4,100 (10.9.1) 12/31/X5 33,440 (10.9.5) balance 37,540 Additional Pension Liability 01/01/X5 4,100 (10.9.1) 12/31/X5 33,440 (10.9.5) balance 37,540 Additional Pension Liability Ending Balance = $37,540. 19. Excess of Additional Liability Over Unrecognized Pension Service Cost Balance (10.9.7) Excess of Additional Liability Over Unrec- = Additional Pension Liability Ending Balance (10.9.1) ognized Pension Service Cost Balance Unrecognized Prior Service Cost Ending Balance (before Prepaid/Accrued Pension Cost close) (10.3.1) (10.9.7) Excess of Additional Liability Over Unrec- = 37,540 32,000 = 5,540 ognized Pension Service Cost Balance 20. Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment (10.9.8) Excess of Additional Liability Over Unrec- = Excess of Additional Liability Over Unrecognized ognized Pension Service Cost Adjustment Pension Service Cost Balance (10.9.7) Excess of Additional Liability Over Unrecognized Pension Service Cost Beginning Balance (10.9.6) (10.9.8) Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment = 5,540 0 = 5,540

21. If Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment > 0 Debit Credit 12/31/XX Excess of Additional Liability Over Unrecognized Pension Service Cost (10.9.8) Deferred Pension Cost (10.9.8)

10.6. DEFINED BENEFIT PLAN: 20X6 Debit 5,540 Credit 5,540

189

12/31/X5 Ledgers

Excess of Additional Liability Over Unrecognized Pension Service Cost Deferred Pension Cost Deferred Pension Cost

01/01/X5 4,100 (10.9.2) 12/31/X5 33,440 (10.9.5) 12/31/X5 5,540 (10.9.6) balance 32,000 Deferred Pension Cost Ending Balance = $32,000. Excess of Additional Pension Liability Over Unrecognized Prior Service Cost 12/31/X5 5,540 (10.9.6) balance 5,540 Excess of Additional Pension Liability Over Unrecognized Prior Service Cost = $5,540.

10.6

Dened Benet Plan: 20X6

Example 79, 20X6: Plan Assets, 01/01/X6 = $159,600. Projected Benet Obligation, 01/01/X6 = $265,000. Accumulated Benet Obligation, 12/31/X6 = $263,000. Unrecognized Net Gain/Loss, 01/01/X6 = $29,940. Additional Pension Liability, 01/01/X6 = $37,540. Annual Service Cost = $16,000. Settlement Rate = 10%. Assets Expected Rate = 10%. Actual return on plan assets = $22,000. Contributions = $27,000. Benets paid to retirees during the year = $18,000. Unrecognized Prior Service Cost, 01/01/X6 = $32,000. Unrecognized Net Gain/Loss, 01/01/X6 = $29,940. Excess of Additional Pension Liability Over Prior Service Cost, 01/01/X6 = $5,540. Deferred Pension Cost, 01/01/X6 = $32,000. Amortization of Prior Service Cost = $17,600. Average service life of all coverted empolyees is 20 years. What is the Pension Expense? What is the Prepaid/Accrued Pension Cost Balance? What is the Additional Pension Liability Ending Balance? What is the Deferred Pension Cost Ending Balance? What is the Excess of Additional Liability Over Unrecognized Pension Service Cost Balance? Solution 79: Initial Ledger Balances Plan Assets 01/01/X6 159,600 (10.1.9) balance 159,600 Projected Benet Obligation 01/01/X6 265,000 (10.1.5) balance 265,000 Unrecognized Prior Service Cost 01/01/X6 32,000 (10.3.1) balance 32,000

190

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Unrecognized Net Gain/Loss 01/01/X6 29,940 balance 29,940 Additional Pension Liability 01/01/X6 37,540 balance 37,540 Deferred Pension Cost 01/01/X6 32,000 balance 37,540 Excess of Additional Pension Liability Over Unrecognized Prior Service Cost 01/01/X6 5,540 (10.9.6) balance 5,540

1. Journal Entry for Interest Cost (10.1.12) Interest Cost = Projected Benet Obligation (10.1.5) Settlement Rate (10.1.11) (10.1.12) Interest Cost = 265,000 0.10 = 26,500 Journal Entry 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.12) Debit 26,500 Credit (10.1.12) Credit 26,500

12/31/X6 Ledgers

Pension Expense 12/31/X6 26,500 (10.1.12) balance 26,500 Projected Benet Obligation 01/01/X6 265,000 (10.1.5) 12/31/X6 26,500 (10.1.12) balance 291,500 2. Journal Entry for Service Cost 12/31/XX Pension Expense Projected Benet Obligation Pension Expense Projected Benet Obligation Debit (10.1.13) Debit 16,000 Credit (10.1.13) Credit 16,000

12/31/X6 Ledgers

Pension Expense 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) balance 42,500 Projected Benet Obligation 01/01/X6 265,000 (10.1.5) 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) balance 307,500

10.6. DEFINED BENEFIT PLAN: 20X6 3. Journal Entry for Plan Assets Increase Debit Credit 12/31/XX Plan Assets (10.1.14) Pension Expense (10.1.14) 12/31/X6 Ledgers Pension Expense 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) 12/31/X6 22,000 (10.1.14) balance 20,500 Plan Assets 01/01/X6 159,600 (10.1.9) 12/31/X6 22,000 (10.1.14) balance 181,600 4. (10.6.3) Plan Assets Expected Return = Plan Assets (10.1.9) Beginning Balance Plan Assets Expected Rate of Return (10.6.2) (10.6.3) Plan Assets Expected Return = 159,600 0.10 = 15,960 5. Journal Entry for Unexpected Net Gain/Loss (10.6.4) Unexpected Net Gain/(Loss) = Plan Assets Return (10.1.14) Plan Assets Expected Return (10.6.3) (10.6.4) Unexpected Net Gain/(Loss) = 22,000 15,960 = 6,040 Journal Entry, If Unexpected Net Gain 12/31/XX Pension Expense Unrecognized Net Gain/Loss Pension Expense Unrecognized Net Gain/Loss Debit (10.6.4) Debit 6,040 Credit (10.6.4) Credit 6,040 Plan Assets Pension Expense Debit 22,000 Credit 22,000

191

12/31/X6 Ledgers

Pension Expense 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) 12/31/X6 22,000 (10.1.14) 12/31/X6 6,040 (10.6.4) balance 26,540 Unrecognized Net Gain/Loss 01/01/X6 29,940 12/31/X6 6,040 (10.6.4) balance 23,900 6. Journal Entry for Contributions Debit 12/31/XX Plan Assets (10.1.15) Cash

Credit (10.1.15)

192 Debit 27,000 Credit 27,000 Plan Assets 01/01/X6 159,600 (10.1.9) 12/31/X6 22,000 (10.1.14) 12/31/X6 27,000 (10.1.15) balance 208,600 7. Journal Entry for Benets Paid 12/31/XX Projected Benet Obligation Plan Assets Projected Benet Obligation Plan Assets Plan Assets 01/01/X6 159,600 (10.1.9) 12/31/X6 22,000 (10.1.14) 12/31/X6 27,000 (10.1.15)

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

12/31/X6 Ledger

Plan Assets Cash

Debit (10.1.16) Debit 18,000

Credit (10.1.16)

Credit 18,000

12/31/X6 Ledgers

12/31/X6 18,000 (10.1.16) balance 190,600 Projected Benet Obligation 01/01/X6 265,000 (10.1.5) 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) 12/31/X6 18,000 (10.1.16) balance 289,500 8. Journal Entry, Amortization for Unrecognized Prior Service Cost Debit (10.5.7) Debit 17,600 Credit (10.5.7) Credit 17,600

12/31/XX

Pension Expense Unrecognized Prior Service Cost Pension Expense Unrecognized Prior Service Cost Pension Expense

12/31/X6 Ledgers

12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) 12/31/X6 22,000 (10.1.14) 12/31/X6 6,040 (10.6.4) 12/31/X6 17,600 (10.5.7) balance 44,140 Unrecognized Prior Service Cost 01/01/X6 32,000 (10.3.1) 01/01/X6 17,600 (10.5.7) balance 14,400 9. Projected Benet Obligation Corridor (10.6.6) Projected Benet Obligation Corridor = Projected Benet Obligation Beginning Balance (10.1.5) 0.10

10.6. DEFINED BENEFIT PLAN: 20X6 (10.6.6) Projected Benet Obligation Corridor = 265,000 0.10 = 26,500 10. Plan Assets Corridor (10.6.7) Plan Assets Corridor = Plan Assets Beginning Balance (10.1.9) 0.10 (10.6.7) Plan Assets Corridor = 159,600 0.10 = 15,960 11. Corridor Amount If Projected Benet Obligation Corridor (10.6.6) > Plan Assets Corridor (10.6.7) then: (10.6.8) Corridor Amount = Projected Benet Obligation Corridor (10.6.6) If Plan Assets Corridor (10.6.7) > Projected Benet Obligation Corridor (10.6.6) then: (10.6.8) Corridor Amount = Plan Assets Corridor (10.6.7) (10.6.8) Corridor Amount = 26,500 12. Possible Corridor Amortization (10.6.9) Possible Corridor Amortization = Unrecognized Net Gain/Loss Beginning Balance (10.6.1) Corridor Amount (10.6.8) (10.6.9) Possible Corridor Amortization = 29,940 26,500 = 3,440 Since Possible Corridor Amortization > 0 then Smooth Gain or Loss. 13. Corridor Amortization (10.6.13) Corridor Amortization = Possible Corridor Amortization (10.6.9) Average Remaining Service-Years Participating Employees (10.6.12) (10.6.13) Corridor Amortization = 3,440 20 = 172 Journal Entry, If Possible Corridor Amortization (10.6.9) > 0 then: Journal Entry, If Corridor Amount (10.6.8) = Projected Benet Obligation Corridor (10.6.6) 12/31/XX Pension Expense Unrecognized Net Gain/Loss Pension Expense Unrecognized Net Gain/Loss Debit (10.6.13) Debit 172 Credit (10.6.13) Credit 172

193

12/31/X6 Ledgers

Pension Expense 12/31/X6 26,500 (10.1.12) 12/31/X6 16,000 (10.1.13) 12/31/X6 22,000 (10.1.14) 12/31/X6 6,040 (10.6.4) 12/31/X6 17,600 (10.5.7) 12/31/X6 172 (10.6.13) balance 44,312 Unrecognized Net Gain/Loss 01/01/X6 29,940 12/31/X6 6,040 (10.6.4) 12/31/X6 172 (10.6.13) balance 23,728 14. Closing Journal Entries

194

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Closing Journal Entry For Projected Benet Obligation 12/31/XX Projected Benet Obligation Prepaid/Accrued Pension Cost Projected Benet Obligation Prepaid/Accrued Pension Cost Debit (10.1.5) Ending Balance Debit 289,500 Credit 289,500 Debit (10.1.9) Ending Balance Debit 190,600 Credit 190,600 Credit (10.1.9) Ending Balance Credit (10.1.5) Ending Balance

12/31/X6

Closing Journal Entry For Plan Assets 12/31/XX Prepaid/Accrued Pension Cost Plan Assets Prepaid/Accrued Pension Cost Plan Assets

12/31/X6

Closing Journal Entry For Unrecognized Prior Service Cost Debit 12/31/XX Prepaid/Accrued Pension Cost (10.3.1) Ending Balance Unrecognized Prior Service Cost 12/31/X6 Prepaid/Accrued Pension Cost Unrecognized Prior Service Cost Debit 14,400 Credit 14,400

Credit (10.3.1) Ending Balance

Closing Journal Entry For Unrecognized Net Gain/Loss Journal Entry, If Debit Balance 12/31/XX Prepaid/Accrued Pension Costs (10.2) Unrecognized Net Gain/Loss Prepaid/Accrued Pension Cost Unrecognized Net Gain/Loss Debit 23,728 Debit (10.6.1) Ending Balance Credit 23,728 Credit (10.6.1) Ending Balance

12/31/X6 Ledger

Prepaid/Accrued Pension Cost 12/31/X6 289,500 (10.1.5) 12/31/X6 190,600 (10.1.9) 12/31/X6 14,400 (10.3.1) 12/31/X6 23,728 (10.6.1) balance 60,772 Prepaid/Accrued Pension Cost = $60,772 Accrued Pension Cost

Minimum Liability
15. Unfunded Accumulated Benet Obligation (10.9.3) Unfunded Accumulated Benet Obligation = Accumulated Benet Obligation (10.1.6) Plan Assets Ending Balance (before paid/Accrued Pension Cost close) (10.1.9) (10.9.3) Unfunded Accumulated Benet Obligation = 263,000 190,600 = 72,400 16. Additional Pension Liability Ending Balance (10.9.4) Additional Pension Liability Ending Balance = Unfunded Accumulated Benet Obligation (10.9.3) Prepaid/Accrued Pension Cost Ending Balance (10.2) (10.9.4) Additional Pension Liability Ending Balance = 72,400 60,772 = 11,628 Pre-

10.6. DEFINED BENEFIT PLAN: 20X6

195

17. Additional Pension Liability Adjustment (10.9.5) Additional Pension Liability Adjustment = Additional Pension Liability Beginning Balance (10.9.1) Additional Pension Liability Ending Balance (10.9.4) (10.9.5) Additional Pension Liability Adjustment = 37,540 11,628 = 25,912 18. Journal Entry, If Additional Pension Liability Adjustment > 0 Debit Credit 12/31/XX Deferred Pension Cost (10.9.2) (10.9.5) Additional Pension Liability (10.9.1) (10.9.5) 12/31/X6 Ledgers Deferred Pension Cost 01/01/X6 32,000 12/31/X6 25,912 (10.9.5) balance 6,088 Additional Pension Liability 01/01/X6 37,540 (10.9.1) 12/31/X6 25,912 (10.9.5) balance 11,628 Additional Pension Liability Ending Balance = $11,628. 19. Excess of Additional Liability Over Unrecognized Pension Service Cost Balance (10.9.7) Excess of Additional Liability Over Unrec- = Additional Pension Liability Ending Balance (10.9.1) ognized Pension Service Cost Balance Unrecognized Prior Service Cost Ending Balance (before Prepaid/Accrued Pension Cost close) (10.3.1) (10.9.7) Excess of Additional Liability Over Unrec- = 11,628 14,400 = -2,772 ognized Pension Service Cost Balance If Excess of Additional Liability Over Unrecognized Pension Service Cost Balance < 0 then: Excess of Additional Liability Over Unrecognized Pension Service Cost Balance = 0 20. Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment (10.9.8) Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment = Excess of Additional Liability Over Unrecognized Pension Service Cost Balance (10.9.7) Excess of Additional Liability Over Unrecognized Pension Service Cost Beginning Balance (10.9.6) = 0 5,540 = -5,540 Deferred Pension Cost (10.9.2) Additional Pension Liability (10.9.1) Debit 25,912 Credit 25,912

(10.9.8) Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment

21. If Excess of Additional Liability Over Unrecognized Pension Service Cost Adjustment < 0 Debit Credit 12/31/XX Deferred Pension Cost (10.9.8) Excess of Additional Liability Over Unrecognized Pension Service Cost (10.9.8) Debit Credit 12/31/X6 Deferred Pension Cost 5,540 Excess of Additional Liability Over Unrecognized Pension Service Cost 5,540 Ledgers

196

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Deferred Pension Cost 01/01/X6 32,000 12/31/X6 25,912 (10.9.5) 12/31/X6 5,540 (10.9.8) balance 11,628 Deferred Pension Cost Balance = $11,628. Excess of Additional Pension Liability Over Unrecognized Prior Service Cost 01/01/X6 5,540 (10.9.6) 12/31/X6 5,540 (10.9.8) balance 0 Excess of Additional Pension Liability Over Unrecognized Prior Service Cost Balance = $0.

10.7

Other Post-Retirement Benet Plan: Simple

Example 80, 20X3: Postretirement Plan Assets, 01/01/X3 = $0. Initial Unrecognized Transition Amount, 01/01/X3 = $400,000. Annual Service Cost = $22,000. Discount Rate = 8%. Contributions = $38,000. Benets paid to retirees during the year = $28,000. Average Remaining Service-Years Participating Employees = 25. What is the Postretirement Expense? What is the Prepaid/Accrued Pension Cost Balance? Solution 80:

1. Journal Entry for Initial Unrecognized Transition Amount 01/01/XX Unrecognized Transition Amount Accumulated Postretirement Benet Obligation Unrecognized Transition Amount Accumulated Postretirement Benet Obligation Debit (10.11.5) Debit 400,000 Credit (10.11.5) Credit 400,000

01/01/X3 Ledgers

Unrecognized Transition Amount 01/01/X3 400,000 (10.11.5) balance 400,000 Accumulated Postretirement Benet Obligation 01/01/X3 400,000 (10.11.5) balance 400,000 2. Journal Entry for Postretirement Service Cost (10.11.7) Debit Credit 12/31/XX Postretirement Expense (10.11.7) Accumulated Pension Benet Obligation (10.11.7) Debit Credit 12/31/X3 Postretirement Expense 22,000 Accumulated Pension Benet Obligation 22,000 Ledgers Postretirement Expense 12/31/X3 22,000 (10.11.7) balance 22,000

10.7. OTHER POST-RETIREMENT BENEFIT PLAN: SIMPLE Accumulated Postretirement Benet Obligation 01/01/X3 400,000 (10.11.5) 12/31/X3 22,000 (10.11.7) balance 422,000

197

3. Postretirement Interest Cost (10.11.9) Postretirement Interest Cost = Accumulated Postretirement Benet Obligation (10.11.3) Beginning Balance Discount Rate (10.11.8 ) (10.11.9) Postretirement Interest Cost = 400,000 0.08 = 32,000 Journal Entry 12/31/XX Postretirement Expense Accumulated Postretirement Benet Obligation Postretirement Expense Accumulated Postretirement Benet Obligation Debit (10.11.9) Debit 32,000 Credit

(10.11.9) Credit 32,000

12/31/X3

Ledgers Postretirement Expense 12/31/X3 22,000 (10.11.7) 12/31/X3 32,000 (10.11.9) balance 54,000 Accumulated Postretirement Benet Obligation 01/01/X3 400,000 (10.11.5) 12/31/X3 22,000 (10.11.7) 12/31/X3 32,000 (10.11.9) balance 454,000 4. Journal Entry for Contributions 12/31/XX Postretirement Plan Assets (10.11.6) Cash Postretirement Plan Assets (10.11.6) Cash Debit (10.11.11) Debit 38,000 Credit

(10.11.11) Credit 38,000

12/31/X3

Ledger Postretirement Plan Assets 12/31/X3 38,000 (10.11.11) balance 38,000 5. Postretirement Unrecognized Transition Amortization (10.11.12) Unrecognized Transition Amount (10.11.5) Opening Balance Postretirement Unrecognized = Average Remaining Service-Years Participating Employees (10.6.12) Transition Amortization 400,000 Postretirement Unrecognized Transition Amortization = 25 = 16,000 Journal Entry 12/31/XX Postretirement Expense Unrecognized Transition Amount Postretirement Expense Unrecognized Transition Amount Debit (10.11.12) Debit 16,000 Credit

(10.11.12) Credit 16,000

12/31/X3

198 Ledgers

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

Postretirement Expense 12/31/X3 22,000 (10.11.7) 12/31/X3 32,000 (10.11.9) 12/31/X3 16,000 (10.11.12) balance 70,000 Postretirement Expense = $70,000. Unrecognized Transition Amount 01/01/X3 400,000 (10.11.5) 12/31/X3 16,000 (10.11.12) balance 384,000 6. Journal Entry for Benets Paid 12/31/XX Accumulated Postretirement Benet Obligation Postretirement Plan Assets Accumulated Postretirement Benet Obligation Postretirement Plan Assets Debit (10.11.13) Debit 28,000 Credit

(10.11.13) Credit 28,000

12/31/X3 Ledgers

Accumulated Postretirement Benet Obligation 01/01/X3 400,000 (10.11.5) 12/31/X3 22,000 (10.11.7) 12/31/X3 32,000 (10.11.9) 12/31/X3 28,000 (10.11.13) balance 426,000 Postretirement Plan Assets 12/31/X3 38,000 (10.11.11) 12/31/X3 28,000 (10.11.11) balance 10,000 7. Accumulated Postretirement and Retirement Plan Assets Closing Entries Journal Entry 12/31/XX Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Debit (10.11.3) Ending Balance Debit 426,000 Credit 426,000 Debit (10.11.6) Ending Balance Debit 10,000 Credit 10,000 Credit (10.11.6) Ending Balance Credit (10.11.3) Ending Balance

12/31/X3

Journal Entry 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets

12/31/X3

8. Unrecognized Transition Amount Closing Entries Journal Entry 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount Debit (10.11.5) Ending Balance Credit (10.11.5) Ending Balance

10.8. OTHER POST-RETIREMENT BENEFIT PLAN: COMPLEX Debit 384,000 Credit 384,000

199

12/31/X3 Ledger

Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount

Prepaid/Accrued Postretirement Cost 12/31/X3 426,000 (10.11.3) 12/31/X3 10,000 (10.11.6) 12/31/X3 384,000 (10.11.5) balance 32,000 Prepaid/Accrued Postretirement Cost = $32,000 Accrued Postretirement Cost. 9. Financial Statement Reversing Entries Journal Entry 12/31/XX Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Debit (10.11.3) Ending Balance Debit 426,000 Credit 426,000 Debit (10.11.6) Ending Balance Debit 10,000 Credit 10,000 Debit (10.11.5) Ending Balance Debit 384,000 Credit 384,000 Credit (10.11.5) Ending Balance Credit (10.11.6) Ending Balance Credit (10.11.3) Ending Balance

12/31/X3

Journal Entry 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets

12/31/X3

Journal Entry 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount

12/31/X3 Ledger

Prepaid/Accrued Postretirement Cost 12/31/X3 426,000 (10.11.3) 12/31/X3 10,000 (10.11.6) 12/31/X3 384,000 (10.11.5) 12/31/X3 426,000 (10.11.3) 12/31/X3 10,000 (10.11.6) 12/31/X3 384,000 (10.11.5) balance 0

10.8

Other Post-Retirement Benet Plan: Complex

Example 81, 20X4: Postretirement Plan Assets, 01/01/X4 = $10,000. Accumulated Postretirement Benet Obligation, 01/01/X4 = $426,000. Unrecognized Transition Amount Opening Balance = $400,000. Unrecognized Transition Amount, 01/01/X4 = $384,000. Actuarial assumptions decrease Accumulated Postretirement Benet Obligation = $60,000. Annual Service Cost = $26,000. Discount Rate = 8%.

200

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

Expected Rate of Postretirement Return = 8%. Actual Return on Postretirement Plan Assets = $600. Contributions = $50,000. Benets paid to retirees during the year = $35,000. Average Remaining Service-Years Participating Employees = 25. What is the Postretirement Expense? What is the Prepaid/Accrued Postretirement Cost Balance? Solution 81: Initial Ledger Balances Postretirement Plan Assets 01/01/X4 10,000 (10.11.6) balance 10,000 Accumulated Postretirement Benet Obligation 01/01/X4 426,000 (10.11.6) balance 426,000 Unrecognized Transition Amount 01/01/X4 384,000 (10.11.5) balance 384,000 1. Journal Entry for Postretirement Service Cost (10.11.7) Debit Credit 12/31/XX Postretirement Expense (10.11.7) Accumulated Pension Benet Obligation (10.11.7) Debit Credit 12/31/X4 Postretirement Expense 26,000 Accumulated Pension Benet Obligation 26,000 Ledgers Postretirement Expense 12/31/X4 26,000 (10.11.7) balance 26,000 Accumulated Postretirement Benet Obligation 01/01/X4 426,000 (10.11.6) 12/31/X4 26,000 (10.11.7) balance 452,000 2. Journal Entry for Postretirement Interest Cost (10.11.9) Postretirement Interest Cost = Accumulated Postretirement Benet Obligation (10.11.3) Beginning Balance Discount Rate (10.11.8 ) (10.11.9) Postretirement Interest Cost = 426,000 0.08 = 34,080 Journal Entry 12/31/XX Postretirement Expense (10.11.1) Accumulated Postretirement Benet Obligation Postretirement Expense (10.11.1) Accumulated Postretirement Benet Obligation Debit (10.11.9) Debit 34,080 Credit

(10.11.9) Credit 34,080

12/31/X4 Ledgers

Postretirement Expense 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.9) balance 60,080

10.8. OTHER POST-RETIREMENT BENEFIT PLAN: COMPLEX Accumulated Postretirement Benet Obligation 01/01/X4 426,000 (10.11.6) 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.7) balance 486,080 3. Journal Entry for Increase In Postretirement Plan Assets Debit Credit 12/31/XX Postretirement Plan Assets (10.11.10) Postretirement Expense (10.11.10) Debit Credit 12/31/X4 Postretirement Plan Assets 600 Postretirement Expense 600 Ledgers Postretirement Expense 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.9) 12/31/X4 600 (10.11.10) balance 60,080 Postretirement Plan Assets 01/01/X4 10,000 (10.11.6) 12/31/X4 600 (10.11.10) balance 10,600 4. Journal Entry for Postretirement Contributions 12/31/XX Debit Credit Postretirement Plan Assets (10.11.6) (10.11.11) Cash (10.11.11) Debit Credit Postretirement Plan Assets 50,000 Cash 50,000

201

12/31/X4

Ledger Postretirement Plan Assets 01/01/X4 10,000 (10.11.6) 12/31/X4 600 (10.11.10) 12/31/X4 50,000 (10.11.11) balance 60,600 5. Postretirement Unrecognized Transition Amortization (10.11.12) Unrecognized Transition Amount (10.11.5) Opening Balance Postretirement Unrecognized = Average Remaining Service-Years Participating Employees (10.6.12) Transition Amortization 400,000 Postretirement Unrecognized Transition Amortization = 25 = 16,000 Journal Entry 12/31/XX Postretirement Expense Unrecognized Transition Amount Postretirement Expense Unrecognized Transition Amount Debit (10.11.12) Debit 16,000 Credit

(10.11.12) Credit 16,000

12/31/X4

Ledgers

202

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES Postretirement Expense 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.9) 12/31/X4 600 (10.11.10) 12/31/X4 16,000 (10.11.12) balance 76,080 Unrecognized Transition Amount 01/01/X4 384,000 (10.11.5) 12/31/X4 16,000 (10.11.12) balance 368,000

6. Journal Entry for Postretirement Benets Paid 12/31/XX Accumulated Postretirement Benet Obligation Postretirement Plan Assets Accumulated Postretirement Benet Obligation Postretirement Plan Assets Debit (10.11.13) Debit 35,000 Credit

(10.11.13) Credit 35,000

12/31/X4 Ledgers

Postretirement Plan Assets 01/01/X4 10,000 (10.11.6) 12/31/X4 600 (10.11.10) 12/31/X4 50,000 (10.11.11) 12/31/X4 35,000 (10.11.13) balance 25,600 Accumulated Postretirement Benet Obligation 01/01/X4 426,000 (10.11.6) 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.7) 12/31/X4 35,000 (10.11.13) balance 451,080

7. Postretirement Plan Assets Expected Return (10.12.2) Postretirement Plan Assets Expected Return = Postretirement Plan Assets (10.11.6) Beginning Balance Expected Rate of Postretirement Return (10.12.1) Postretirement Plan Assets Expected Return = 10,000 0.08 = 800 8. Postretirement Unexpected Net Gain/(Loss) (10.12.4) Postretirement Unexpected Net Gain/(Loss) = Postretirement Plan Assets Return (10.11.10) Postretirement Plan Assets Expected Return (10.12.2) Postretirement Unexpected Net Gain/(Loss) = 600 800 = -200 Journal Entry, If Unexpected Net (Loss) 12/31/XX Postretirement Unrecognized Net Gain/Loss (10.12.3) Postretirement Expense (10.11.1) Postretirement Unrecognized Net Gain/Loss (10.12.3) Postretirement Expense (10.11.1) Debit (10.12.4) Debit 200 Credit

(10.12.4) Credit 200

12/31/X4

Ledgers

10.8. OTHER POST-RETIREMENT BENEFIT PLAN: COMPLEX Postretirement Expense 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.9) 12/31/X4 600 (10.11.10) 12/31/X4 16,000 (10.11.12) 12/31/X4 200 (10.12.4) balance 75,280 Postretirement Expense = $75,280 Postretirement Unrecognized Net Gain/Loss 12/31/X4 200 (10.12.4) balance 200 9. Journal Entry, If Postretirement Liability (Loss) 12/31/XX Postretirement Unrecognized Net Gain/Loss (10.12.3) Accumulated Postretirement Benet Obligation Postretirement Unrecognized Net Gain/Loss (10.12.3) Accumulated Postretirement Benet Obligation Debit (10.12.5) Debit 60,000 Credit

203

(10.12.5) Credit 60,000

12/31/X4

Ledgers Postretirement Unrecognized Net Gain/Loss 12/31/X4 200 (10.12.4) 12/31/X4 60,000 (10.12.5) balance 60,200 Accumulated Postretirement Benet Obligation 01/01/X4 426,000 (10.11.6) 12/31/X4 26,000 (10.11.7) 12/31/X4 34,080 (10.11.7) 12/31/X4 35,000 (10.11.13) 12/31/X4 60,000 (10.12.5) balance 511,080 10. Accumulated Postretirement Benet Obligation Corridor (10.12.6) Accumulated Postretirement Benet = Accumulated Postretirement Benet Obligation Corridor Obligation Beginning Balance 0.10 Accumulated Postretirement Benet Obligation Corridor = 426,000 0.10 = 42,600

11. Postretirement Plan Assets Corridor (10.12.7) Postretirement Plan Assets Corridor = Postretirement Plan Assets Beginning Balance 0.10 Postretirement Plan Assets Corridor = 10,000 0.10 = 100

12. Postretirement Corridor Amount (10.12.8) If Accumulated Postretirement Benet Obligation Corridor (10.12.6) > Postretirement Plan Assets Corridor (10.12.7) then: Postretirement Corridor Amount = Accumulated Postretirement Benet Obligation Corridor (10.12.6)

If Postretirement Plan Assets Corridor (10.12.7) > Accumulated Postretirement Benet Obligation Corridor (10.12.6) then: Postretirement Corridor Amount = Postretirement Plan Assets Corridor (10.12.7) Postretirement Corridor Amount = 42,600

204

CHAPTER 10. RETIREMENT BENEFIT PLAN EXAMPLES

13. Possible Postretirement Corridor Amortization (10.12.9) Possible Postretirement Corridor Amortization = Postretirement Unrecognized Net Gain/Loss Beginning Balance (10.12.3) Postretirement Corridor Amount (10.12.8) Possible Postretirement Corridor Amortization = 0 42,600 = -42,600 Since Possible Corridor Amortization < 0 then Smoothing Gains and Losses (10.6) is complete. 14. Accumulated Postretirement and Retirement Plan Assets Closing Entries Journal Entry (10.11.14) 12/31/XX Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Accumulated Postretirement Benet Obligation Prepaid/Accrued Postretirement Cost (10.11.4) Debit (10.11.3) Ending Balance Debit 511,080 Credit 511,080 Debit (10.11.6) Ending Balance Debit 25,600 Credit 25,600 Credit (10.11.6) Ending Balance Credit (10.11.3) Ending Balance

12/31/X4

Journal Entry (10.11.14) 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets Prepaid/Accrued Postretirement Cost (10.11.4) Postretirement Plan Assets

12/31/X4

15. Unrecognized Transition Amount Closing Entries (10.11.15) 12/31/XX Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount Prepaid/Accrued Postretirement Cost (10.11.4) Unrecognized Transition Amount Debit (10.11.5) Ending Balance Debit 368,000 Credit 368,000 Credit (10.11.5) Ending Balance

12/31/X4

16. Postretirement Unrecognized Net Gain/Loss Closing Entry (10.12.12) Journal Entry, If Debit Balance 12/31/XX Prepaid/Accrued Postretirement Costs (10.11.4) Postretirement Unrecognized Net Gain/Loss Prepaid/Accrued Postretirement Costs (10.11.4) Postretirement Unrecognized Net Gain/Loss Debit (10.12.3) Ending Balance Debit 60,200 Credit 60,200 Credit (10.12.3) Ending Balance

12/31/X4 Ledger

Prepaid/Accrued Postretirement Cost 12/31/X4 511,080 (10.11.3) 12/31/X4 25,600 (10.11.6) 12/31/X4 368,000 (10.11.5) 12/31/X4 60,200 (10.12.3) balance 57,280 Prepaid/Accrued Postretirement Cost = $57,280 Accrued Postretirement Cost.

Chapter 11

Interperiod Tax Examples


11.1 Proportional Taxes Example

Example 82: Purchase Price = $6,000. Sales tax rate = 7%. What is the tax liability? What is the average tax rate? Solution 82: 1. Proportional Tax Liability Amount (11.1.6) Proportional Tax Liability Amount = Purchase Price (11.1.2) Sales Tax Rate (11.1.3) Proportional Tax Liability Amount = 6,000 0.07 = $420 2. Average Tax Rate (11.1.5) Tax Liability Amount (11.1.4) Average Tax Rate = Tax Base Amount (11.1.2) 420 = 0.07 Average Tax Rate = 6,000

11.2

Progressive or Regressive Taxes Example

Example 83: Taxable Income = $200,000. What is the Corporate 2007 tax liability? What is the average tax rate? Solution 83: 1. Corporate 2007 Progressive or Regressive Tax Rate Schedule (11.1.9) Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount 0 50,000 15% 50,000 50,000 75,000 25% 25,000 75,000 100,000 34% 25,000 100,000 335,000 39% 235,000 335,000 10,000,000 34% 9,665,000 10,000,000 15,000,000 35% 5,000,000 15,000,000 18,333,333 38% 3,333,333 18,333,333 Innity 35% Innity

Tax Amount

= (11.1.7) 205

206

CHAPTER 11. INTERPERIOD TAX EXAMPLES

2. Progressive or Regressive Tax Liability Algorithm (11.1.10) 1 Remaining = Tax Base Amount (11.1.2) 2 For L in each layer from top to bottom: 2.1 If Remaining <= DierenceL then: 2.2 Layer AmountL = Remaining 2.3 Tax AmountL = Layer AmountL Marginal RateL 2.4 Remaining = 0 2.5 Goto step 3 2.6 If Remaining > DierencesL then: 2.7 Layer AmountL = DierenceL 2.8 Tax AmountL = Layer AmountL Marginal RateL 2.9 Remaining = Remaining - DierenceL 3 For L in each layer from top to bottom: 3.1 Tax Liability Amount (11.1.7) = Tax Liability Amount + Tax AmountL 3. Remaining = Tax Base Amount (11.1.2) Remaining = 200,000 4. Populate Layer Amount and Tax Amount 2.6 Since Remaining > Dierence1 then: 2.7 Layer Amount1 = Dierence1 2.8 Tax Amount1 = Layer Amount1 Marginal Rate1 2.9 Remaining = Remaining - Dierence1 Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence 0 50,000 15% 50,000 Remaining = 200,000 150,000 2.6 Since Remaining > Dierence2 then: 2.7 Layer Amount2 = Dierence2 2.8 Tax Amount2 = Layer Amount2 Marginal Rate2 2.9 Remaining = Remaining - Dierence2 Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence 0 50,000 15% 50,000 50,000 75,000 25% 25,000 Remaining = 200,000 150,000 125,000 2.6 Since Remaining > Dierence3 then: 2.7 Layer Amount3 = Dierence3 2.8 Tax Amount3 = Layer AmountL Marginal Rate3 2.9 Remaining = Remaining - Dierence3 Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence 0 50,000 15% 50,000 50,000 75,000 25% 25,000 75,000 100,000 34% 25,000 Remaining = 200,000 150,000 125,000 100,000 2.1 Since Remaining <= Dierence4 then: 2.2 Layer Amount4 = Remaining 2.3 Tax Amount4 = Layer Amount4 Marginal Rate4 2.4 Remaining = 0 2.5 Goto step 3 Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence 0 50,000 15% 50,000 50,000 75,000 25% 25,000 75,000 100,000 34% 25,000 100,000 335,000 39% 235,000 Remaining = 200,000 150,000 125,000 100,000 0

Layer Amount 50,000

Tax Amount 7,500

Layer Amount 50,000 25,000

Tax Amount 7,500 6,250

Layer Amount 50,000 25,000 25,000

Tax Amount 7,500 6,250 8,500

Layer Amount 50,000 25,000 25,000 100,000

Tax Amount 7,500 6,250 8,500 39,000

11.3. INTERPERIOD TAX JOURNAL ENTRY: MAX COMPANY YEAR 1 3 3.1 For L in each layer from top to bottom: Tax Liability Amount (11.1.7) = Tax Liability Amount + Tax AmountL Corporate 2007 Tax Rate Schedule Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount 0 50,000 15% 50,000 50,000 50,000 75,000 25% 25,000 25,000 100,000 34% 25,000 25,000 75,000 100,000 335,000 39% 235,000 100,000

207

Tax Amount 7,500 6,250 8,500 39,000 (11.1.7) = $61,250

Tax Liability Amount (11.1.7) = $61,250 5. Average Tax Rate (11.1.5) Tax Liability Amount (11.1.4) or (11.1.7) Average Tax Rate = Tax Base Amount (11.1.2) 61,250 Average Tax Rate = 200,000 = 0.31

11.3

Interperiod Tax Journal Entry: Max Company Year 1

Example 84: Credit Sales = $90,000. Credit Sales Collections = $0. Estimated Warranty Expense = $30,000. Warranty Claims = $10,000. Pretax Accounting Income = $100,000. Current Average Tax Rate = 30%. Enacted Marginal Tax Rate = 40%. Calculate Net Income. Prepare the interperiod tax journal entry. Solution 84: 1. Temporary Dierence Current Asset (11.4.1) Temporary Dierence Current Asset = (Estimated Warranty Expense Warranty Claims) (Estimated Bad Debt Expense Bad Debt Write Os) (Estimated Expense Cash Paid On Previous Estimations) (Accrued Wages Accrued Wages Paid) (Estimated Discontinued Operations Discontinued Operations Realized) (Litigation Loss Estimate Litigation Loss Realized) (Cash Collected In Advance Deliveries From Cash Collected In Advance) (Loss Recording Inventory at LCM Realized Loss) [Loss Carryforward (Net Income Loss Carryforward Balance)] Temporary Dierence Current Asset = (30,000 10,000) = 20,000 2. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales Cash Collected On Credit Sales) + (Prepaid Expenses Prepaid Consumed) Temporary Dierence Current Liability = (90,000 0) = 90,000 3. Temporary Dierence Asset (11.4.5) Temporary Dierence Asset = Temporary Dierence Current Asset (11.4.1) + Temporary Dierence Noncurrent Asset (11.4.2) Temporary Dierence Asset = 20,000 + 0 = 20,000 4. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = 90,000 + 0 = 90,000

+ + + + + + + +

208

CHAPTER 11. INTERPERIOD TAX EXAMPLES

5. Deferred Tax Current Asset (11.5.1) Deferred Tax Current Asset = Temporary Dierence Current Asset (11.4.1) Enacted Marginal Tax Rate (11.1.8) Deferred Tax Current Asset = 20,000 0.40 = 8,000 6. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate (11.1.8) Deferred Tax Current Liability = 90,000 0.40 = 36,000 7. Deferred Tax Asset (11.5.5) Deferred Tax Asset = Deferred Tax Current Asset (11.5.1) + Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Asset = 8,000 + 0 = 8,000 8. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = 36,000 + 0 = 36,000 9. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 100,000 + 20,000 90,000 0 = 30,000 10. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate (11.1.5) Income Tax Payable = 30,000 0.30 = 9,000 11. Deferred Portion of Income Tax Expense (11.6.3) Deferred Portion of Income Tax Expense = [Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5)] Deferred Portion of Income Tax Expense = 36,000 8,000 = 28,000 12. Income Tax Expense (11.6.4) Income Tax Expense = Current Portion of Income Tax Expense (11.6.2) + Deferred Portion of Income Tax Expense (11.6.3) Income Tax Expense = 9,000 + 28,000 = 37,000 13. Net Income (11.6.6) Net Income = Pretax Accounting Income (11.3.3) Income Tax Expense (11.6.4) Net Income = 100,000 37,000 = 63,000 14. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 37,000 Deferred Tax Current Asset 8,000 Deferred Tax Current Liability 36,000 Income Tax Payable 9,000

12/31/01

11.4. INTERPERIOD TAX JOURNAL ENTRY: MAX COMPANY YEAR 2

209

11.4

Interperiod Tax Journal Entry: Max Company Year 2

Example 85: Credit Sales = $120,000. Credit Sales Collections = $50,000. Estimated Warranty Expense = $40,000. Warranty Claims = $15,000. Pretax Accounting Income = $80,000. Current Average Tax Rate = 40%. Enacted Marginal Tax Rate = 40%. Calculate Net Income. Prepare the interperiod tax journal entry. Solution 85: 1. Temporary Dierence Current Asset (11.4.1) Temporary Dierence Current Asset = (Estimated Warranty Expense Warranty Claims) (Estimated Bad Debt Expense Bad Debt Write Os) (Estimated Expense Cash Paid On Previous Estimations) (Accrued Wages Accrued Wages Paid) (Estimated Discontinued Operations Discontinued Operations Realized) (Litigation Loss Estimate Litigation Loss Realized) (Cash Collected In Advance Deliveries From Cash Collected In Advance) (Loss Recording Inventory at LCM Realized Loss) [Loss Carryforward (Net Income Loss Carryforward Balance)] Temporary Dierence Current Asset = (40,000 15,000) = 25,000 2. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales Cash Collected On Credit Sales) + (Prepaid Expenses Prepaid Consumed) Temporary Dierence Current Liability = (120,000 50,000) = 70,000 3. Temporary Dierence Asset (11.4.5) Temporary Dierence Asset = Temporary Dierence Current Asset (11.4.1) + Temporary Dierence Noncurrent Asset (11.4.2) Temporary Dierence Asset = 25,000 + 0 = 25,000 4. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = 70,000 + 0 = 70,000 5. Deferred Tax Current Asset (11.5.1) Deferred Tax Current Asset = Temporary Dierence Current Asset (11.4.1) Enacted Marginal Tax Rate (11.1.8) Deferred Tax Current Asset = 25,000 0.40 = 10,000 6. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate (11.1.8) Deferred Tax Current Liability = 70,000 0.40 = 28,000 7. Deferred Tax Asset (11.5.5) Deferred Tax Asset = Deferred Tax Current Asset (11.5.1) + Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Asset = 10,000 + 0 = 10,000 8. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = 28,000 + 0 = 28,000 + + + + + + + +

210 9. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 80,000 + 25,000 70,000 0 = 35,000

CHAPTER 11. INTERPERIOD TAX EXAMPLES

10. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate (11.1.5) Income Tax Payable = 35,000 0.40 = 14,000 11. Deferred Portion of Income Tax Expense (11.6.3) Deferred Portion of Income Tax Expense = [Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5)] Deferred Portion of Income Tax Expense = 28,000 10,000 = 18,000 12. Income Tax Expense (11.6.4) Income Tax Expense = Current Portion of Income Tax Expense (11.6.2) + Deferred Portion of Income Tax Expense (11.6.3) Income Tax Expense = 14,000 + 18,000 = 32,000 13. Net Income (11.6.6) Net Income = Pretax Accounting Income (11.3.3) Income Tax Expense (11.6.4) Net Income = 80,000 32,000 = 48,000 14. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 32,000 Deferred Tax Current Asset 10,000 Deferred Tax Current Liability 28,000 Income Tax Payable 14,000

12/31/02

11.5

Interperiod Tax Journal Entry: Smith, Inc.

Example 86: Revenues Same GAAP and Tax = $90,000. Expenses Same GAAP and Tax = $71,000. Amortization never deductible for tax = $6,000. Rent collected at end of year = $5,000. Estimated warranty expense = $4,000. Warrancy claims = $0. Current Average Tax Rate = 30%. Current Marginal Tax Rate = 30%. Prepare the interperiod tax journal entry. Solution 86: 1. Nondeductible Expenses (11.2.2) Nondeductible Expenses = Fines and penalties + Premiums on life insurance policies + Other expenses never deductible Nondeductible Expenses = 6,000

11.5. INTERPERIOD TAX JOURNAL ENTRY: SMITH, INC. 2. Income Statement Revenues (11.3.1) Income Statement Revenues = Revenues Same GAAP and Tax Nontaxable Revenue (11.2.1) Credit Sales Service Performed But Not Collected Revenue Recognized on Previous Collections Income Statement Revenues = 90,000 3. Income Statement Expenses (11.3.2) Income Statement Expenses = Expenses Same GAAP and Tax + Nondeductible Expenses (11.2.2) + Estimated Warranty Costs + Estimated Bad Debt Expense + Accrued Wages + Depreciation Expense Income Statement Expenses = 71,000 + 6,000 + 4,000 = 81,000 4. Net Permanent Dierence (11.2.3) Net Permanent Dierence = Nontaxable Revenues (11.2.1) Nondeductible Expenses (11.2.2) Net Permanent Dierence = 0 6,000 = -6,000 5. Pretax Accounting Income (11.3.3) Pretax Accounting Income = Income Statement Revenues (11.3.1) Income Statement Expenses (11.3.2) Pretax Accounting Income = 90,000 81,000 = 9,000

211

+ + + +

6. Temporary Dierence Current Asset (11.4.1) Temporary Dierence Current Asset = (Estimated Warranty Expense Warranty Claims) (Estimated Bad Debt Expense Bad Debt Write Os) (Estimated Expense Cash Paid On Previous Estimations) (Accrued Wages Accrued Wages Paid) (Estimated Discontinued Operations Discontinued Operations Realized) (Litigation Loss Estimate Litigation Loss Realized) (Cash Collected In Advance Deliveries From Cash Collected In Advance) (Loss Recording Inventory at LCM Tax Benet Upon Sale) [Loss Carryforward (Net Income Loss Carryforward Balance)] Temporary Dierence Current Asset = (4,000 0) + (5,000 0) = 9,000 7. Temporary Dierence Asset (11.4.5) Temporary Dierence Asset = Temporary Dierence Current Asset (11.4.1) + Temporary Dierence Noncurrent Asset (11.4.2) Temporary Dierence Asset = 9,000 + 0 = 9,000 8. Deferred Tax Current Asset (11.5.1) Deferred Tax Current Asset = Temporary Dierence Current Asset (11.4.1) Enacted Marginal Tax Rate Deferred Tax Current Asset = 9,000 0.30 = 2,700 9. Deferred Tax Asset (11.5.5) Deferred Tax Asset = Deferred Tax Current Asset (11.5.1) + Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Asset = 2,700 + 0 = 2,700 10. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income =

+ + + + + + + +

9,000 9,000 0 -6,000 24,000

212

CHAPTER 11. INTERPERIOD TAX EXAMPLES

11. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 24,000 0.30 = 7,200 12. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + [Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5)] Income Tax Expense = 7,200 + [0 2,700] = 4,500 13. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 4,500 Deferred Tax Current Asset 2,700 Income Tax Payable 7,200

12/31/XX

11.6

Calculate Net Income: Jones, Inc.

Example 87: In year 1, Jones, Inc. has revenue of $200 for both books and tax. It also has a ne of $10 which is not tax deductible. Tax rate is 20%. What is the net income? Solution 87: Revenues Same GAAP and Tax = 200 Fines and penalties = 10 Current Average Tax Rate = 0.20 Current Marginal Tax Rate = 0.20 1. Nondeductible Expenses (11.2.2) Nondeductible Expenses = Fines and penalties + Premiums of life insurance policies Nondeductible Expenses = 10 2. Income Statement Revenues (11.3.1) Income Statement Revenues = Revenues Same GAAP and Tax Nontaxable Revenue (11.2.1) Credit Sales Service Performed But Not Collected Revenue Recognized on Previous Collections Income Statement Revenues = 200 3. Income Statement Expenses (11.3.2) Income Statement Expenses = Expenses Same GAAP and Tax Nondeductible Expenses (11.2.2) Estimated Warranty Costs Estimated Bad Debt Expense Accrued Wages Depreciation Expense Income Statement Expenses = 10 + + + + + + + + +

4. Pretax Accounting Income (11.3.3) Pretax Accounting Income = Income Statement Revenues (11.3.1) Income Statement Expenses (11.3.2) Pretax Accounting Income = 200 10 = 190

11.7. CALCULATE INCOME TAX EXPENSE: WILLIARD COMPANY YEAR 1 5. Net Permanent Dierence (11.2.3) Net Permanent Dierence = Nontaxable Revenues (11.2.1) Nondeductible Expenses (11.2.2) Net Permanent Dierence = 0 10 = -10 6. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 190 + 0 0 (-10) = 200 7. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 200 0.2 = 40 8. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + [Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5)] Income Tax Expense = 40 + [0.0 0.0] = 40 9. Net Income (11.6.6) Net Income = Pretax Accounting Income (11.3.3) Income Tax Expense (11.6.4) Net Income = 190 40 = 150

213

11.7

Calculate Income Tax Expense: Williard Company Year 1

Example 88: Williard Company reported $5,000 pretax accounting income for the year ended December 31, 20X1, the rst year of operation. Williard made installment sales with revenue of $600 during 20X1 to be collected evenly over 3 years, starting with the current year. The current tax rate is 40%, but Congress enacted a future tax rate of 30%. What is the income tax expense? Solution 88: Pretax Accounting Income = 5,000 Credit Sales = 600 Cash Collected On Credit Sales = 200 Current Average Tax Rate = 0.40 Enacted Marginal Tax Rate = 0.30 1. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales - Cash Collected On Credit Sales) + (Prepaid Expenses - Prepaid Consumed) Temporary Dierence Current Liability = 600 200 = 400 2. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = 400 + 0 = 400 3. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate (11.5.3) Deferred Tax Current Liability = 400 0.30 = 120 4. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = 120 + 0 = 120

214 5. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 5,000 + 0 400 0 = 4,600 6. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 4,600 0.40 = 1,840

CHAPTER 11. INTERPERIOD TAX EXAMPLES

7. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + [Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5)] Income Tax Expense = 1,840 + [120 0.0] = 1,960 8. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 1,960 Deferred Tax Current Liability 120 Income Tax Payable 1,840

12/31/X1

Ledger Deferred Tax Current Liability 12/31/X1 120 balance 120

11.8

Calculate Income Tax Expense: Williard Company Year 2

Example 89: Williard Company reported $6,000 pretax accounting income for the year ended December 31, 20X2, the second year of operation. Williard made installment sales with revenue of $800 during 20X2 to be collected evenly over 2 years, starting with the current year. Also collected was $200 from the previous years credit sale. The current tax rate is 30%. What is the income tax expense? Solution 89: Pretax Accounting Income = 6,000 Credit Sales = 800 Cash Collected On Credit Sales = 600 Current Average Tax Rate = 0.30 Enacted Marginal Tax Rate = 0.30 1. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales - Cash Collected On Credit Sales) + (Prepaid Expenses - Prepaid Consumed) Temporary Dierence Current Liability = 800 600 = 200 2. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = 200 + 0 = 200

11.9. CALCULATE EFFECTIVE TAX RATE: BLUE PAPER YEAR 1 3. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate Deferred Tax Current Liability = 200 0.30 = 60 4. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = 60 + 0 = 60 5. Taxable Income (11.6.1 Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 6,000 200 = 5,800 6. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 5,800 0.30 = 1,740 7. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5) Income Tax Expense = 1,740 + 60 0.0 = 1,800 8. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 1,800 Deferred Tax Current Liability 60 Income Tax Payable 1,740

215

12/31/X2

Ledger Deferred Tax Current Liability 12/31/X1 120 12/31/X2 60 balance 180

11.9

Calculate Eective Tax Rate: Blue Paper Year 1

Example 90: Blue Paper company has the following summary: Year ended = December 31, 20X1. Pretax accounting income = $200,000. Credit sales = $18,000. The current tax rate is 30%. What is the income tax expense? What is the eective tax rate? Solution 90:

216 Pretax Accounting Income = 200,000 Credit Sales = 18,000 Current Average Tax Rate = 0.30 Enacted Marginal Tax Rate = 0.30

CHAPTER 11. INTERPERIOD TAX EXAMPLES

1. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales - Cash Collected On Credit Sales) + (Prepaid Expenses - Prepaid Consumed) Temporary Dierence Current Liability = 18,000 0 = 18,000 2. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = 18,000 + 0 = 18,000 3. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate Deferred Tax Current Liability = 18,000 0.30 = 5,400 4. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = 5,400 + 0 = 5,400 5. Taxable Income (11.6.1) Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 200,000 18,000 = 182,000 6. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 182,000 0.30 = 54,600 7. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5) Income Tax Expense = 54,600 + 5,400 0 = 60,000 8. Net Income (11.6.6) Net Income = Pretax Accounting Income (given) Income Tax Expense (11.6.4) Net Income = 200,000 60,000 = 140,000 9. Eective Tax Rate (11.7.3) Eective Tax Rate = Income Tax Expense (11.6.4) Pretax Accounting Income (given) Eective Tax Rate = 60,000 200,000 = 0.30 10. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Income Tax Expense Deferred Tax Current Asset Deferred Tax Noncurrent Asset Deferred Tax Current Liability Deferred Tax Noncurrent Liability Income Tax Payable Debit (11.6.4) (11.5.1) (11.5.2) Credit

(11.5.3) (11.5.4) (11.6.2)

11.10. CALCULATE EFFECTIVE TAX RATE: BLUE PAPER YEAR 2 Debit 60,000 Credit 5,400 54,600

217

12/31/X1

Income Tax Expense Deferred Tax Current Liability Income Tax Payable

Ledger Deferred Tax Current Liability 12/31/X1 5,400

11.10

Calculate Eective Tax Rate: Blue Paper Year 2

Example 91: The next year, Blue Paper company has the following summary: Year ended = December 31, 20X2. Pretax accounting income = $200,000. Premium on life insurance policy = $5,000. Cash collected on credit sales = $12,000. The current tax rate is 30%. What is the income tax expense? What is the eective tax rate? Solution 91: Pretax Accounting Income = 200,000 Premiums on life insurance policies = 5,000 Cash collected on credit sales = 12,000 Current Average Tax Rate = 0.30 Enacted Marginal Tax Rate = 0.30 1. Nondeductible Expenses (11.2.2) Nondeductible Expenses = Fines and penalties + Premiums on life insurance policies Nondeductible Expenses = 5,000 2. Net Permanent Dierence (11.2.3) Net Permanent Dierence = Nontaxable Revenues (11.2.1) Nondeductible Expenses (11.2.2) Net Permanent Dierence = 0 5,000 = -5,000 3. Temporary Dierence Current Liability (11.4.3) Temporary Dierence Current Liability = (Credit Sales - Cash Collected On Credit Sales) + (Prepaid Expenses - Prepaid Consumed) Temporary Dierence Current Liability = 0 - 12,000 = -12,000 4. Temporary Dierence Liability (11.4.6) Temporary Dierence Liability = Temporary Dierence Current Liability (11.4.3) + Temporary Dierence Noncurrent Liability (11.4.4) Temporary Dierence Liability = -12,000 + 0 = -12,000 5. Deferred Tax Current Liability (11.5.3) Deferred Tax Current Liability = Temporary Dierence Current Liability (11.4.3) Enacted Marginal Tax Rate Deferred Tax Current Liability = -12,000 0.30 = -3,600 6. Deferred Tax Liability (11.5.6) Deferred Tax Liability = Deferred Tax Current Liability (11.5.3) + Deferred Tax Noncurrent Liability (11.5.4) Deferred Tax Liability = -3,600 + 0 = -3,600 7. Taxable Income (11.6.1)

218

CHAPTER 11. INTERPERIOD TAX EXAMPLES Taxable Income = + Pretax Accounting Income (11.3.3) + Temporary Dierence Asset (11.4.5) Temporary Dierence Liability (11.4.6) Net Permanent Dierence (11.2.3) Taxable Income = 200,000 + 0 (-12,000) (-5,000) = 217,000

8. Income Tax Payable (11.6.2) Income Tax Payable = Taxable Income (11.6.1) Current Average Tax Rate Income Tax Payable = 217,000 0.30 = 65,100 9. Income Tax Expense (11.6.4) Income Tax Expense = Income Tax Payable (11.6.2) + Deferred Tax Liability (11.5.6) Deferred Tax Asset (11.5.5) Income Tax Expense = 65,100 + (-3,600) 0 = 61,500 10. Net Income (11.6.6) Net Income = Pretax Accounting Income (given) Income Tax Expense (11.6.4) Net Income = 200,000 65,500 = 138,500 11. Eective Tax Rate (11.7.3) Eective Tax Rate = Income Tax Expense (11.6.4) Pretax Accounting Income (given) Eective Tax Rate = 61,500 200,000 = 0.3075 12. Interperiod Tax Journal Entry (11.6.5) 12/31/XX Debit Credit Income Tax Expense (11.6.4) Deferred Tax Current Asset (11.5.1) Deferred Tax Noncurrent Asset (11.5.2) Deferred Tax Current Liability (11.5.3) Deferred Tax Noncurrent Liability (11.5.4) Income Tax Payable (11.6.2) Debit Credit Income Tax Expense 61,500 Deferred Tax Current Liability 3,600 Income Tax Payable 65,100

12/31/X2

Ledger Deferred Tax Current Liability 12/31/X1 5,400 12/31/X2 3,600 balance 1,800

Chapter 12

Foreign Transactions Examples


12.1 Purchase Transaction, Immediate Payment

Example 92 Transaction quantity = 12,500. Cost per unit = 20 Euros. Transaction date = 11/8/X5. Settlement date = 11/8/X5. Spot rate 11/8/X5: 1 Euro = $0.8555. Record the purchase journal entry. Solution 92: 1. Transaction Amount (12.1.17) Transaction Amount = Quantity Cost Per Unit In Foreign Denomination (12.1.1) Transaction Amount = 12,500 20 = 250,000 2. Purchase Dollar Equivalent (12.1.18) Purchase Dollar Equivalent = Transaction Amount (12.1.17) Transaction Exchange Rate (12.1.11) Purchase Dollar Equivalent = 250,000 0.8555 = 213,875 3. Immediate Payment Purchase Transaction (12.2.1) XX/XX/XX Inventory Cash Debit Purchase Dollar Equivalent (12.1.18) Credit 213,875 Credit Purchase Dollar Equivalent (12.1.18)

11/8/X5

Inventory Cash

Debit 213,875

12.2

Purchase Transaction, Delayed Payment

Example 93 Transaction quantity = 12,500. Cost per unit = 20 Euros. Transaction date = 11/8/X5. Settlement date = 2/8/X6. Balance sheet date = 3/31/X6. Spot rate 11/8/X5: 1 Euro = $0.8555. Spot rate 2/8/X6: 1 Euro = $0.9187. Record the purchase journal entry. Record the settlement journal entry. Solution 93: 219

220

CHAPTER 12. FOREIGN TRANSACTIONS EXAMPLES

1. Transaction Amount (12.1.17) Transaction Amount = Quantity Cost Per Unit In Foreign Denomination (12.1.1) Transaction Amount = 12,500 20 = 250,000 2. Purchase Dollar Equivalent (12.1.18) Purchase Dollar Equivalent = Transaction Amount (12.1.17) Transaction Exchange Rate (12.1.11) Purchase Dollar Equivalent = 250,000 0.8555 = 213,875 3. Delayed Payment Purchase Transaction (12.2.2) XX/XX/XX Inventory Accounts Payable Debit Purchase Dollar Equivalent (12.1.18) Credit 213,875 Credit Purchase Dollar Equivalent (12.1.18)

11/8/X5

Inventory Accounts Payable

Debit 213,875

4. Purchase Exchange Gain/(Loss) Amount (12.2.3) Since No Intermediary Balance Sheet Date (12.1.7) then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Transaction Exchange Rate (12.1.11) Settlement Exchange Rate (12.1.13)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.8555 0.9187] = -15,800 5. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) Since Purchase Exchange Gain/(Loss) Amount (12.2.3) < 0 then: Debit Credit XX/XX/XX Exchange Losses and Gains |(12.2.3)| Accounts Payable |(12.2.3)| Debit Credit 2/08/X6 Exchange Losses and Gains 15,800 Accounts Payable 15,800 6. Settlement Dollar Equivalent (12.2.5) Settlement Dollar Equivalent = Transaction Amount (12.1.17) Settlement Exchange Rate (12.1.13) Settlement Dollar Equivalent = 250,000 0.9187 = 229,675 7. Delayed Payment Settlement Transaction Journal Entry (12.2.6) Debit XX/XX/XX Accounts Payable Settlement Dollar Equivalent (12.2.5) Cash Debit Credit 2/08/X6 Accounts Payable 229,675 Cash 229,675 Credit Settlement Dollar Equivalent (12.2.5)

12.3

Purchase Transaction, Balance Sheet Date

Example 94 Transaction quantity = 12,500. Cost per unit = 20 Euros. Transaction date = 11/8/X5. Balance sheet date = 12/31/X5. Settlement date = 2/8/X6. Spot rate 11/8/X5: 1 Euro = $0.8555. Spot rate 12/31/X5: 1 Euro = $0.9389. Spot rate 2/8/X6: 1 Euro = $0.9187. Record the purchase journal entry. Record the adjusting journal entry.

12.3. PURCHASE TRANSACTION, BALANCE SHEET DATE Record the settlement journal entry. Solution 94: 1. Transaction Amount (12.1.17) Transaction Amount = Quantity Cost Per Unit In Foreign Denomination (12.1.1) Transaction Amount = 12,500 20 = 250,000 2. Purchase Dollar Equivalent (12.1.18) Purchase Dollar Equivalent = Transaction Amount (12.1.17) Transaction Exchange Rate (12.1.11) Purchase Dollar Equivalent = 250,000 0.8555 = 213,875 3. Delayed Payment Purchase Transaction (12.2.2) XX/XX/XX Inventory Accounts Payable Debit Purchase Dollar Equivalent (12.1.18) Credit 213,875

221

Credit Purchase Dollar Equivalent (12.1.18)

11/8/X5

Inventory Accounts Payable

Debit 213,875

4. Purchase Exchange Gain/(Loss) Amount (12.2.3) 12/31/X5 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Balance Sheet Date then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Transaction Exchange Rate (12.1.11) Balance Exchange Rate (12.1.14)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.8555 0.9389] = -20,850 5. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) Since Purchase Exchange Gain/(Loss) Amount (12.2.3) < 0 then: Debit Credit XX/XX/XX Exchange Losses and Gains |(12.2.3)| Accounts Payable |(12.2.3)| Debit Credit 12/31/X5 Exchange Losses and Gains 20,850 Accounts Payable 20,850 6. Purchase Exchange Gain/(Loss) Amount (12.2.3) 2/8/X6 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Settlement Date (12.1.6) then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Balance Exchange Rate (12.1.14) Settlement Exchange Rate (12.1.13)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.9389 0.9187] = 5,050 7. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) Since Purchase Exchange Gain/(Loss) Amount (12.2.3) > 0 then: Debit Credit XX/XX/XX Accounts Payable (12.2.3) Exchange Losses and Gains (12.2.3) Debit Credit 2/08/X6 Accounts Payable 5,050 Exchange Losses and Gains 5,050 8. Settlement Dollar Equivalent (12.2.5) Settlement Dollar Equivalent = Transaction Amount (12.1.17) Settlement Exchange Rate (12.1.13) Settlement Dollar Equivalent = 250,000 0.9187 = 229,675 9. Delayed Payment Settlement Transaction Journal Entry (12.2.6) Debit XX/XX/XX Accounts Payable Settlement Dollar Equivalent (12.2.5) Cash Credit Settlement Dollar Equivalent (12.2.5)

222 Debit 229,675 Credit 229,675

CHAPTER 12. FOREIGN TRANSACTIONS EXAMPLES

2/08/X6

Accounts Payable Cash

12.4

Purchase Transaction, Forward Contract

Example 95 Transaction quantity = 12,500. Cost per unit = 20 Euros. Transaction date = 11/8/X5. Balance sheet date = 12/31/X5. Settlement date = 2/8/X6. Hedge instrument = Forward contract. Forward Exchange Rate Table Date Spot Rate 2/8/X6 Forward Rate Transaction 0.8555 0.8475 0.9389 0.9450 Balance Sheet Settlement 0.9187 0.9187 Record the purchase journal entry. Record the adjusting journal entry. Record the settlement journal entry. Solution 95: 1. Transaction Amount (12.1.17) Transaction Amount = Quantity Cost Per Unit In Foreign Denomination (12.1.1) Transaction Amount = 12,500 20 = 250,000 2. Purchase Dollar Equivalent (12.1.18) Purchase Dollar Equivalent = Transaction Amount (12.1.17) Transaction Exchange Rate (12.1.11) Purchase Dollar Equivalent = 250,000 0.8555 = 213,875 3. Delayed Payment Purchase Transaction (12.2.2) XX/XX/XX Inventory Accounts Payable Debit Purchase Dollar Equivalent (12.1.18) Credit 213,875 Credit Purchase Dollar Equivalent (12.1.18)

11/8/X5 Ledger

Inventory Accounts Payable

Debit 213,875

Accounts Payable 11/08/X5 213,875 balance 213,875 4. Purchase Exchange Gain/(Loss) Amount (12.2.3) 12/31/X5 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Balance Sheet Date then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Transaction Exchange Rate (12.1.11) Balance Exchange Rate (12.1.14)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.8555 0.9389] = -20,850 5. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) 12/31/X5 Since Purchase Exchange Gain/(Loss) Amount (12.2.3) < 0 then: Debit Credit XX/XX/XX Exchange Losses and Gains |(12.2.3)| Accounts Payable |(12.2.3)| Debit Credit 12/31/X5 Exchange Losses and Gains 20,850 Accounts Payable 20,850

12.4. PURCHASE TRANSACTION, FORWARD CONTRACT Ledger Accounts Payable 11/08/X5 213,875 12/31/X5 20,850 balance 234,725

223

6. Forward Gain/(Loss) Amount (12.3.2) 12/31/X5 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Balance Sheet Date then: Forward Gain/(Loss) Amount = Transaction Amount (12.1.17) [Balance Forward Rate (12.1.15) Transaction Forward Rate (12.1.12)] Forward Gain/(Loss) Amount = 250,000 [0.9450 0.8475] = 24,375 7. Forward Gains and Losses Journal Entry (12.3.3) 12/31/X5 Since Forward Gain/(Loss) Amount (12.3.2) > 0 then: XX/XX/XX Foreign Currency Forward Contract ( debit balance, an Asset) Forward Contract Losses and Gains Debit Credit Foreign Currency Forward Contract 24,375 Forward Contract Losses and Gains 24,375 Foreign Currency Forward Contract 12/31/X5 24,375 balance 24,375 8. Purchase Exchange Gain/(Loss) Amount (12.2.3) 2/8/X6 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Settlement Date (12.1.6) then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Balance Exchange Rate (12.1.14) Settlement Exchange Rate (12.1.13)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.9389 0.9187] = 5,050 9. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) 2/8/X6 Since Purchase Exchange Gain/(Loss) Amount (12.2.3) > 0 then: Debit Credit XX/XX/XX Accounts Payable (12.2.3) Exchange Losses and Gains (12.2.3) Debit Credit 02/08/X6 Accounts Payable 5,050 Exchange Losses and Gains 5,050 Ledger Accounts Payable 11/08/X5 213,875 12/31/X5 20,850 02/08/X6 5,050 balance 229,675 10. Forward Gain/(Loss) Amount (12.3.2) 2/8/X6 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Settlement Date (12.1.6) then: Forward Gain/(Loss) Amount = Transaction Amount (12.1.17) [Settlement Exchange Rate (12.1.13) Balance Forward Exchange Rate (12.1.15)] Forward Gain/(Loss) Amount = 250,000 [0.9187 0.9450] = -6,575 11. Forward Gains and Losses Journal Entry (12.3.3) 2/8/X6 Since Forward Gain/(Loss) Amount (12.3.2) < 0 then: XX/XX/XX Forward Losses and Gains Foreign Currency Forward Contract ( credit balance, a Liability) Debit Credit Forward Losses and Gains 6,575 Foreign Currency Forward Contract 6,575 Debit |(12.3.2)| Credit |(12.3.2)| Debit (12.3.2) Credit (12.3.2)

12/31/X5 Ledger

02/08/X6

224 Ledger

CHAPTER 12. FOREIGN TRANSACTIONS EXAMPLES

Foreign Currency Forward Contract 12/31/X5 24,375 02/08/X8 6,575 balance 17,800 12. Forward Settlement Dollar Equivalent (12.3.4) Forward Settlement Dollar Equivalent = Transaction Amount (12.1.17) Transaction Forward Exchange Rate (12.1.12) Forward Settlement Dollar Equivalent = 250,000 0.8475 = 211,875 13. Forward Settlement Transaction Journal Entry (12.3.5) 2/8/X6 Since Foreign Currency Forward Contract has a debit balance: Debit Credit XX/XX/XX Accounts Payable Credit Balance Foreign Currency Forward Contract Debit Balance Cash Forward Settlement Equivalent (12.3.4) Debit Credit 02/08/X6 Accounts Payable 229,675 Foreign Currency Forward Contract 17,800 Cash 211,875

12.5

Purchase Transaction, Option Contract

Example 96 Transaction quantity = 12,500. Cost per unit = 20 Euros. Transaction date = 11/8/X5. Balance sheet date = 12/31/X5. Settlement date = 2/8/X6. Transaction date spot rate = 0.8555. Hedge instrument = Option contract. Option cost = $5,250. Option strike price = 0.86. Option Fair Value Table Date Spot Rate Fair Value Transaction 0.8555 $5,250 Balance Sheet 0.9389 22,200 Settlement 0.9187 14,675 Record the purchase journal entry. Record the adjusting journal entry. Record the settlement journal entry. Solution 96: 1. Transaction Amount (12.1.17) Transaction Amount = Quantity Cost Per Unit In Foreign Denomination (12.1.1) Transaction Amount = 12,500 20 = 250,000 2. Purchase Dollar Equivalent (12.1.18) Purchase Dollar Equivalent = Transaction Amount (12.1.17) Transaction Exchange Rate (12.1.11) Purchase Dollar Equivalent = 250,000 0.8555 = 213,875 3. Delayed Payment Purchase Transaction (12.2.2) XX/XX/XX Inventory Accounts Payable Debit Purchase Dollar Equivalent (12.1.18) Credit Purchase Dollar Equivalent (12.1.18)

12.5. PURCHASE TRANSACTION, OPTION CONTRACT Debit 213,875 Credit 213,875

225

11/8/X5 Ledger

Inventory Accounts Payable

Accounts Payable 11/08/X5 213,875 balance 213,875 4. Foreign Call Option Purchase Transaction (12.4.1) XX/XX/XX Foreign Currency Option Contract ( an Asset) Cash Debit Credit Foreign Currency Option Contract 5,250 Cash 5,250 Foreign Currency Option Contract 11/08/X5 5,250 balance 5,250 5. Purchase Exchange Gain/(Loss) Amount (12.2.3) 12/31/X5 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Balance Sheet Date then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Transaction Exchange Rate (12.1.11) Balance Exchange Rate (12.1.14)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.8555 0.9389] = -20,850 6. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) 12/31/X5 Since Purchase Exchange Gain/(Loss) Amount (12.2.3) < 0 then: Debit Credit XX/XX/XX Exchange Losses and Gains |(12.2.3)| Accounts Payable |(12.2.3)| Debit Credit 12/31/X5 Exchange Losses and Gains 20,850 Accounts Payable 20,850 Ledger Accounts Payable 11/08/X5 213,875 12/31/X5 20,850 balance 234,725 7. Call Option Gain/(Loss) Amount (12.4.2 12/31/X5 Call Option Gain/(Loss) Amount = Option Contract Fair Value Foreign Currency Option Contract Debit Balance Call Option Gain/(Loss) Amount = 22,200 5,250 = 16,950 8. Call Option Gains and Losses Journal Entry (12.4.3) 12/31/X5 Since Call Option Gain/(Loss) Amount (12.4.2) > 0 then: Debit XX/XX/XX Foreign Currency Option Contract ( an Asset) (12.4.2) Foreign Currency Option Losses and Gains Debit Credit 12/31/X5 Foreign Currency Option Contract 16,950 Foreign Currency Option Losses and Gains 16,950 Ledger Foreign Currency Option Contract 11/08/X5 5,250 12/31/X5 16,950 balance 22,200 Debit Option Contract Fair Value Credit Fair Value

11/08/X5 Ledger

Credit (12.4.2)

226

CHAPTER 12. FOREIGN TRANSACTIONS EXAMPLES

9. Purchase Exchange Gain/(Loss) Amount (12.2.3) 2/8/X6 Since Exists Intermediary Balance Sheet Date (12.1.7) and today is the Settlement Date (12.1.6) then: Purchase Exchange Gain/(Loss) Amount = Transaction Amount (12.1.17) [Balance Exchange Rate (12.1.14) Settlement Exchange Rate (12.1.13)] Purchase Exchange Gain/(Loss) Amount = 250,000 [0.9389 0.9187] = 5,050 10. Delayed Payment Exchange Gains and Losses Journal Entry (12.2.4) 2/8/X6 Since Purchase Exchange Gain/(Loss) Amount (12.2.3) > 0 then: Debit Credit XX/XX/XX Accounts Payable (12.2.3) Exchange Losses and Gains (12.2.3) Debit Credit 02/08/X6 Accounts Payable 5,050 Exchange Losses and Gains 5,050 Ledger Accounts Payable 11/08/X5 213,875 12/31/X5 20,850 02/08/X6 5,050 balance 229,675 11. Call Option Gain/(Loss) Amount (12.4.2) 2/8/X6 Call Option Gain/(Loss) Amount = Option Contract Fair Value Foreign Currency Option Contract Debit Balance Call Option Gain/(Loss) Amount = 14,675 22,200 = -7,525 12. Call Option Gains and Losses Journal Entry (12.4.3) 2/8/X6 Since Call Option Gain/(Loss) Amount (12.4.2) < 0 then: Debit Credit XX/XX/XX Foreign Currency Option Losses and Gains |(12.4.2)| Foreign Currency Option Contract |(12.4.2)| Debit Credit 02/08/X6 Foreign Currency Option Losses and Gains 7,252 Foreign Currency Option Contract 7,252 Ledger Foreign Currency Option Contract 11/08/X5 5,250 12/31/X5 16,950 02/08/X6 7,525 balance 14,675 13. Settlement Date Call Option Contract Fair Value (12.4.5) Settlement Date Call Option Contract Fair Value = Transaction Amount (12.1.17) [Spot Rate (12.1.8) Strike Price] Settlement Date Call Option Contract Fair Value = 250,000 [0.9187 0.86] = 14,675 14. Call Option Settlement Dollar Equivalent (12.4.4) 2/8/X6 Since Spot Rate (12.1.8) > Strike Price then: Call Option Settlement Dollar Equivalent = Transaction Amount (12.1.17) Strike Price Call Option Settlement Dollar Equivalent = 250,000 0.86 = 215,000 15. Call Option Settlement Transaction Journal Entry (12.4.6) 2/8/X6 Since Foreign Currency Option Contract has a Debit Balance then: Debit Credit XX/XX/XX Accounts Payable Credit Balance Foreign Currency Option Contract Debit Balance (12.4.5) Cash (12.4.4)

12.5. PURCHASE TRANSACTION, OPTION CONTRACT Debit 229,675 Credit 14,675 215,000

227

02/08/X6

Accounts Payable Foreign Currency Option Contract Cash

228

CHAPTER 12. FOREIGN TRANSACTIONS EXAMPLES

Chapter 13

Partnerships Examples
13.1 Partnership Formation

Example 97 On January 1, 20X5 Bill and Fred invest the following to begin a partnership. Account Bill Fred Cash $25,000 $40,000 Inventory 73,000 Plant Assets 158,000 Accounts Payable 15,600 82,700 Notes Payable Record the formation journal entry. Solution 97: 1. Total Investmentpartner (13.1.3) Bill Let n = the number of assets invested by Bill. n Total Asset Investment Partner = j =1 Partneri Assetj Market Value Total Asset Investment Partner = 25,000 + 158,000 = 183,000 Let n = the number of liabilities invested by Bill. n Total Liability Investment Partner = k=1 Partneri Liabilityk Market Value Total Liability Investment Partner = 82,700 Total Investmentpartner = Total Asset Investment Partner Total Liability Investment Partner Total Investment Bill = 183,000 82,700 = 100,300 2. Total Investmentpartner (13.1.3) Fred Let n = the number of assets invested by Fred. n Total Asset Investment Partner = j =1 Partneri Assetj Market Value Total Asset Investment Partner = 40,000 + 73,000 = 113,000 Let n = the number of liabilities invested by Fred. n Total Liability Investment Partner = k=1 Partneri Liabilityk Market Value Total Liability Investment Partner = 15,600 Total Investmentpartner = Total Asset Investment Partner Total Liability Investment Partner Total Investment Fred = 113,000 15,600 = 97,400 3. Total Investment Assetj (13.1.4) Cash Let n = the number of Cash Assets invested by all of the partners. n Total Investment Assetj = i=1 Partneri Assetj Market Value Total Investment Cash = 25,000 + 40,000 = 65,000 229

230

CHAPTER 13. PARTNERSHIPS EXAMPLES

4. Total Investment Assetj (13.1.4) Inventory Let n = the number of Inventory Assets invested by all of the partners. n Total Investment Assetj = i=1 Partneri Assetj Market Value Total Investment Inventory = 73,000 5. Total Investment Assetj (13.1.4) Plant Assets Let n = the number of Plant Assets invested by all of the partners. n Total Investment Assetj = i=1 Partneri Assetj Market Value Total Investment Plant Assets = 158,000 6. Total Investment Liabilityk (13.1.5) Accounts Payable Let n = the number of Liabilityk s invested by all of the partners. n Total Investment Liabilityk = i=1 Partneri Liabilityk Market Value Total Investment Accounts Payable = 15,600 7. Total Investment Liabilityk (13.1.5) Notes Payable Let n = the number of Liabilityk s invested by all of the partners. n Total Investment Liabilityk = i=1 Partneri Liabilityk Market Value Total Investment Notes Payable = 82,700 8. Initial Investment Account Cash Inventory Plant Assets Accounts Payable Notes Payable Total Table (13.1.6) Bill Fred $25,000 $40,000 73,000 158,000 (15,600) (82,700) 100,300 97,400 Total 65,000 73,000 158,000 (15,600) (82,722)

9. Partnership Formation Journal Entry (13.1.8) XX/XX/XXXX Asset1 ... Assetj Liability1 ... Liabilityk Capital1 (13.1.7) ... Capitalp (13.1.7) Debit Total Investment Asset1 (13.1.4) ... Total Investment Assetj (13.1.4) Credit

Total Investment Liability1 (13.1.5) ... Total Investment Liabilityk (13.1.5) Total Investment Partner1 (13.1.3) ... Total Investment Partnerp (13.1.3) Credit

01/01/20X5

Cash Inventory Plant Assets Accounts Payable Notes Payable Capital, Bill Capital, Fred

Debit 65,000 73,000 158,000

15,600 82,700 100,300 97,400

13.2

Weighted Average Capital Balance

Example 98 On January 1, 20X5 Billie and Francis invest the following to begin a partnership. Account Billie Francis Cash $100,000 $25,000 During the year, the following investments and drawings took place for Billie. Date Transaction Amount May 1 Investment $60,000 November 30 Drawing 24,000 During the year, the following investments and drawings took place for Francis.

13.3. INTEREST COMPENSATION Date August 1 September 30 December 31 Transaction Investment Drawing Drawing Amount $30,000 10,000 5,000

231

Build Billies and Franciss Weighted-Average Capital for Partnerp Table (13.3.7). Solution 98: 1. Weighted-Average Capital for Partnerp Table (13.3.7) Billie Invest/Draw Date Capital Balance (1) Time Period Percent (2) 4 January 1 $100,000 12 7 May 1 160,000 12 1 November 30 136,000 12 Average Capital (1) (2) $33,333 93,333 11,333 138,000

2. Weighted-Average Capital for Partnerp Table (13.3.7) Francis Invest/Draw Date Capital Balance (1) Time Period Percent (2) Average Capital (1) (2) 7 January 1 $25,000 $14,583 12 2 August 1 55,000 9,167 12 3 September 30 45,000 11,250 12 0 5,000 0 December 31 12 35,000

13.3

Interest Compensation

Example 99 On December 31, 20X5 Billie and Francis achieve net income of $80,000. The partnership agreement states that the rst distribution of net income goes to interest compensation, and it states an interest rate of 10%. Billies weighted-average capital balance is $138,000. Francis weighted-average capital balance is $35,000. Record the interest compensation journal entry. Solution 99: 1. Interest Compensation for Partnerp (13.3.10) Billie Since Income Summary (13.3.8) credit balance is suciently high then: Interest Compensation = Weighted-Average Capital for Partnerp (13.3.6) Interest Compensation Interest Rate (13.3.9) Interest Compensation = 138,000 0.10 = 13,800 Debit Income Summary (13.3.8) Interest Compensation Capitalpartner (13.1.7) Debit Credit Income Summary 13,800 Capital, Billie 13,800 Credit Interest Compensation

XX/XX/XXXX

12/31/20X5

2. Interest Compensation for Partnerp (13.3.10) Francis Since Income Summary (13.3.8) credit balance is suciently high then: Interest Compensation = Weighted-Average Capital for Partnerp (13.3.6) Interest Compensation Interest Rate (13.3.9) Interest Compensation = 35,000 0.10 = 3,500 Debit Income Summary (13.3.8) Interest Compensation Capitalpartner (13.1.7) Debit Credit Income Summary 3,500 Capital, Francis 3,500 Credit Interest Compensation

XX/XX/XXXX

12/31/20X5

232

CHAPTER 13. PARTNERSHIPS EXAMPLES

13.4

Bonus Compensation

Example 100 On December 31, 20X5 Billie and Francis achieve net income of $200,000. The partnership agreement states that Francis gets a management bonus of 5% of any excess net income over $150,000. Record the bonus compensation journal entry. Solution 100: 1. Bonus Compensation for Partnermanager (13.3.11) Francis Bonus Amount = [Net Income (13.3.1) Net Income Threshold] Bonus Percent Bonus Amount = [200,000 150,000] 0.05 = 2,500 Since Bonus Amount > 0 then: Debit Credit XX/XX/XXXX Income Summary (13.3.8) Bonus Amount Capitalmanager (13.1.7) Bonus Amount Debit Credit 12/31/20X5 Income Summary 2,500 Capital, Francis 2,500

13.5

Salary Compensation

Example 101 On December 31, 20X5 Billie and Francis achieve net income of $80,000. The partnership agreement states that Billie gets an annual salary for services of $10,000 and Francis gets $25,000. Record the salary compensation journal entry. Solution 101: 1. Total Salary Compensation (13.3.12) Let n = the number of partners. n Total Salary Compensation = i=1 Salary for Partneri Total Salary Compensation = 10,000 + 25,000 = 35,000 2. Full Salary Compensation for Partnerp (13.3.13) Since Income Summary (13.3.8) credit balance >= Total Salary Compensation (13.3.12) then: Debit Credit XX/XX/XXXX Income Summary (13.3.8) Salary Compensation for Partnerp Capitalpartner (13.1.7) Salary Compensation Debit Credit 12/31/20X5 Income Summary 10,000 Capital, Billie 10,000 Debit Credit 12/31/20X5 Income Summary 25,000 Capital, Francis 25,000

13.6

Residual Compensation

Example 102 On December 31, 20X5 Billie and Francis achieve net income of $80,000. After distributing interest, salaries, and the bonus, the Income Summary is left with a credit balance of 27,700. Billie has a residual compensation interest rate of 60% and Francis 40%. Record the residual compensation journal entry. Solution 102:

13.7. NEW PARTNER, BONUS METHOD 1. Residual Compensation Distribution (13.3.16) Since Income Summary (13.3.8) has a credit balance then: Income Summary Credit Balance = Income Summary (13.3.8) credit balance For partner Billie: Residual Compensation = Income Summary Credit Balance Residual Compensation Rate for Partnerp (13.3.15) Residual Compensation = 27,700 0.60 = 16,620 Debit Credit XX/XX/XXXX Income Summary (13.3.8) Residual Compensation Capitalp (13.1.7) Residual Compensation Debit Credit 12/31/20X5 Income Summary 16,620 Capital, Billie 16.620 For partner Francis: Residual Compensation = Income Summary Credit Balance Residual Compensation Rate for Partnerp (13.3.15) Residual Compensation = 27,700 0.40 = 11,080 Debit Credit XX/XX/XXXX Income Summary (13.3.8) Residual Compensation Capitalp (13.1.7) Residual Compensation Debit Credit 12/31/20X5 Income Summary 11,080 Capital, Francis 11,080

233

13.7

New Partner, Bonus Method

Example 103 Manuel and Michelle are each 50% partners and have capital balances of $150,000 and $250,000, respectively. On June 1, 20X5 they have agreed to add Richard as a partner. Richard is oered 10% of prots and losses in exchange for $50,000. What are Manuel and Michelles new prot and loss percent? Record the new partner journal entry using the bonus method. Solution 103: 1. Post-Investment Residual Compensation Rate for Partnerp (13.4.1) For each existing partner p: Post-Investment Residual Compensation Rate Partnerp = Current Residual Compensation Ratep (13.3.15) [Current Residual Compensation Ratep (13.3.15) Residual Compensation Rate PartnerN ewP artner (13.3.15)] For existing partner Manuel: Post-Investment Residual Compensation Rate for Manuel = 0.50 (0.50 0.10) = 0.45 For existing partner Michelle: Post-Investment Residual Compensation Rate for Michelle = 0.50 (0.50 0.10) = 0.45 2. Post-Investment Capital Total (13.4.2) Post-Investment Capital Total = Capitalp (13.1.7) Credit Balance + New Investment Amount Post-Investment Capital Total = 150,000 + 250,000 + 50,000 = 450,000 3. New Partner Gain/(Loss) (13.4.3) New Partner Gain/(Loss) = New Investment Amount [Post-Investment Capital Total (13.4.2) Residual Compensation Rate for PartnerN ewP artner (13.3.15)] New Partner Gain/(Loss) = 50,000 45,000 = 5,000 4. Capital, New Partner (13.5.1) CapitalN ewP artner = Post-Investment Capital Total (13.4.2) Residual Compensation Rate for PartnerN ewP artner (13.3.15) CapitalN ewP artner = 450,000 0.10 = 45,000

234

CHAPTER 13. PARTNERSHIPS EXAMPLES

5. Capital Increase Journal Entry (13.5.2) Since New Partner Gain/(Loss) (13.4.3) > 0 then: For each existing partner p: Gain Partnerp = Gain/(Loss) (13.4.3) Residual Compensation Rate for Partnerp (13.3.15) Debit XX/XX/XXXX Cash New Investment Amount Capital1 (13.1.7) ... Capitalp (13.1.7) CapitalN ewP artner (13.1.7) For existing partner Manuel: Gain, Manuel = 5,000 0.50 = 2,500 For existing partner Michelle: Gain, Michelle = 5,000 0.50 = 2,500 Debit Credit 06/01/20X5 Cash 50,000 Capital, Manuel 2,500 Capital, Michelle 2,500 Capital, Richard 45,000

Credit Gain Partner1 ... Gain Partnerp Capital, New Partner (13.5.1)

13.8

New Partner, Goodwill Method

Example 104 Ken and Victor are 80% and 20% partners and have capital balances of $220,000 and $300,000, respectively. On June 1, 20X5 they have agreed to add Sam as a partner. Sam is oered 25% of prots and losses in exchange for $180,000. What are Ken and Victors new prot and loss percent? Record the new partner journal entry using the goodwill method. Solution 104: 1. Post-Investment Residual Compensation Rate for Partnerp (13.4.1) For each existing partner p: Post-Investment Residual Compensation Rate Partnerp = Current Residual Compensation Ratep (13.3.15) [Current Residual Compensation Ratep (13.3.15) Residual Compensation Rate PartnerN ewP artner (13.3.15)] For existing partner Ken: Post-Investment Residual Compensation Rate for Ken = 0.80 (0.80 0.25) = 0.60 For existing partner Victor: Post-Investment Residual Compensation Rate for Victor = 0.20 (0.20 0.25) = 0.15 2. Post-Investment Capital Total (13.4.2) Post-Investment Capital Total = Capitalp (13.1.7) Credit Balance + New Investment Amount Post-Investment Capital Total = 220,000 + 300,000 + 180,000 = 700,000 3. New Partner Gain/(Loss) (13.4.3) New Partner Gain/(Loss) = New Investment Amount [Post-Investment Capital Total (13.4.2) Residual Compensation Rate for PartnerN ewP artner (13.3.15)] New Partner Gain/(Loss) = 180,000 [700,000 0.25] = 5,000 4. Goodwill Method, Inherent Goodwill, Goodwill Recognized (13.6.4) Since New Partner Gain/(Loss) (13.4.3) > 0 then: Goodwill Recognized = New Investment Amount [Post-Investment Total (13.4.2) Compensation Rate PartnerN ewP artner (13.3.15)] Compensation Rate PartnerN ewP artner (13.3.15) 180,000 [700,000 0.25] Goodwill Recognized = = 20,000 0.25 5. Goodwill Method, Inherent Goodwill, Journal Entry (13.6.5) Since New Partner Gain/(Loss) (13.4.3) > 0 then:

13.8. NEW PARTNER, GOODWILL METHOD For each existing partner p: Goodwill Partnerp = Goodwill Recognized (13.6.4) Residual Compensation Rate for Partnerp (13.3.15) Debit XX/XX/XXXX Cash New Investment Amount Goodwill (13.1.7) Recognized (13.6.4) (13.6.1) CapitalN ewP artner (13.1.7) Capital1 (13.1.7) ... Capitalp (13.1.7) For existing partner Ken: Goodwill, Ken = 20,000 0.80 = 16,000 For existing partner Victor: Goodwill, Victor = 20,000 0.20 = 4,000 Debit Credit 06/01/20X5 Cash 180,000 Goodwill 20,000 Capital, Sam 180,000 Capital, Ken 16,000 Capital, Victor 4,000

235

Credit

New Investment Amount Goodwill Partner1 ... Goodwill Partnerp

236

CHAPTER 13. PARTNERSHIPS EXAMPLES

Chapter 14

Accounting Changes and Error Correction Examples


14.1 Change from LIFO to FIFO

Example 105, 20X6: Air Parts Corporation changed from LIFO to FIFO 20X6. Air Parts has paid dividends of $40 million each year since 1999. Its income tax rate is 40 percent. Retained earnings on January 1, 20X4 was $700 million. Here is the relevant income statement history: 20X6 $950 370 230 20X5 900 420 365 210 20X4 875 405 360 205 Previous Years 4,500 2,000 1,700 1,000

Revenues Cost of goods sold (LIFO) Cost of goods sold (FIFO) Operating Expenses

Show the 20X6 journal entry. Show the 20X6 Income Statement presentation. Show the 20X6 Retained Earnings presentation. Solution 105: 1. Create the Retained Earnings Ledger Under LIFO Retained Earnings balance 01/01/X4 700 = Revenues 20X4 (CGS LIFO 20X4 + Operating 20X4) Tax Rate [Revenues 20X4 (CGI LIFO 20X4 + Operating 20X4)] Net Income 20X4 = 875 (405 + 205) 0.40 [875 (405 + 205)] = 159 Retained Earnings Increase = Net Income 20X4 Dividends = 159 40 = 119 Retained Earnings balance 01/01/X4 700 12/31/X4 119 balance 819 = Revenues 20X5 (CGS LIFO 20X5 + Operating 20X5) Tax Rate [Revenues 20X5 (CGI LIFO 20X5 + Operating 20X5)] Net Income 20X5 = 900 (420 + 210) 0.40 [900 (420 + 210)] = 162 Retained Earnings Increase = Net Income 20X5 Dividends = 162 40 = 122 237 Net Income 20X5 Net Income 20X4

238

CHAPTER 14. ACCOUNTING CHANGES AND ERROR CORRECTION EXAMPLES Retained Earnings balance 01/01/X4 700 12/31/X4 119 12/31/X5 122 balance 941

2. New Method Total Pretax Income Prior To Previous Year (14.1.2) New Method Total Pretax Income Prior To Previous Year = 4,500 (1,000 + 1,700) + 875 (205 + 360) = 2,110 3. Old Method Total Pretax Income Prior To Previous Year (14.1.3) Old Method Total Pretax Income Prior To Previous Year = 4,500 (1,000 + 2,000) + 875 (205 + 405) = 1,765 4. New Method Pretax Income Previous Year (14.1.4) New Method Pretax Income Previous Year = 900 (210 + 365) = 325 5. Old Method Pretax Income Previous Year (14.1.5) Old Method Pretax Income Previous Year = 900 (210 + 420) = 270 6. New Method Pretax Income Current Year (14.1.6) New Method Pretax Income Current Year = 950 (230 + 370) = 350 7. New Method Total Pretax Income At Beginning Current Year (14.1.7) New Method Total Pretax Income At Beginning Current Year = New Method Total Pretax Income Prior To Previous Year (14.1.2) + New Method Pretax Income Previous Year (14.1.4) New Method Total Pretax Income At Beginning Current Year = 2,110 + 325 = 2,435 8. Old Method Total Pretax Income At Beginning Current Year (14.1.8) Old Method Total Pretax Income At Beginning Current Year = Old Method Total Pretax Income Prior To Previous Year (14.1.3) + Old Method Pretax Income Previous Year (14.1.5) Old Method Total Pretax Income At Beginning Current Year = 1,765 + 270 = 2,035 9. Total Pretax Income Dierence (14.1.9) Total Pretax Income Dierence = New Method Total Pretax Income At Beginning Current Year (14.1.7) Old Method Total Pretax Income At Beginning Current Year (14.1.8) Total Pretax Income Dierence = 2,435 2,035 = 400 10. Income Dierence Tax Eect (14.1.10) Income Dierence Tax Eect = Total Pretax Income Dierence (14.1.9) Eective Tax Rate Income Dierence Tax Eect = 400 X 0.40 = 160 11. Income Eect Net Of Tax (14.1.11) Income Eect Net Of Tax = Total Pretax Income Dierence (14.1.9) Income Dierence Tax Eect (14.1.10) Income Eect Net Of Tax = 400 160 = 240

14.1. CHANGE FROM LIFO TO FIFO

239

Journal Entry, If Inventory Costing and Total Pretax Income Dierence > 0 Debit Credit 01/01/XX Inventory Total Pretax Income Dierence (14.1.9) Deferred Tax Liability Income Dierence Tax Eect (14.1.10) Retained Earnings Income Eect Net Of Tax (14.1.11) Debit Credit 01/01/X6 Inventory 400 Deferred Tax Liability 160 Retained Earnings 240 Retained Earnings balance 01/01/X4 700 12/31/X4 119 12/31/X5 122 01/01/X6 240 balance 1,181 12. Previous Year New Net Income (14.1.12) Previous Year New Net Income = New Method Pretax Income Previous Year (14.1.4) [New Method Pretax Income Previous Year (14.1.4) Eective Tax Rate] Previous Year New Net Income = 325 [325 0.40] = 195 13. Current Year Net Income (14.1.14) Current Year Net Income = New Method Pretax Income Current Year (14.1.6) [New Method Pretax Income Current Year (14.1.6) Eective Tax Rate] Current Year Net Income = 350 [350 .040] = 210 14. Retrospective Approach: Income Statement Summary Presentation (14.1.16) Current Year Previous Year Net Income Current Year Net Income (14.1.14) Previous Year New Net Income (14.1.12) Earnings Per Share Current Year Earnings Per Share (14.1.15) Previous Year New Earnings Per Share (14.1.13) 20X6 210 20X5 195

Net Income

15. Prior To Previous Year Dierence (14.1.17) Prior To Previous Year Dierence = New Method Total Pretax Income Prior To Previous Year (14.1.2) Old Method Total Pretax Income Prior To Previous Year (14.1.3) Prior To Previous Year Dierence = 2,110 1,765 = 345 16. Prior To Previous Year Dierence Tax Eect (14.1.18) Prior To Previous Year Dierence Tax Eect = Prior To Previous Year Dierence (14.1.17) Eective Tax Rate Prior To Previous Year Dierence Tax Eect = 345 0.40 = 138 17. Prior To Previous Year Dierence Net Of Tax (14.1.19) Prior To Previous Year Dierence Net Of Tax = Prior To Previous Year Dierence (14.1.17) Prior To Previous Year Dierence Tax Eect (14.1.18) Prior To Previous Year Dierence Net Of Tax = 345 138 = 207

240

CHAPTER 14. ACCOUNTING CHANGES AND ERROR CORRECTION EXAMPLES

18. Retrospective Approach: Statement of Retained Earnings Presentation (14.1.20) Retained Earnings balance 01/01/X4 700 12/31/X4 119 balance 819 Current Year Retained Earnings, Beginning Cumulative Eect of New Accounting Method Adjusted Retained Earnings, Beginning Add: Net Income Deduct: Dividends Retained Earnings, Ending Retained Earnings, Beginning Cumulative Eect of New Accounting Method Adjusted Retained Earnings, Beginning Add: Net Income Deduct: Dividends Retained Earnings, Ending Previous Year Retained Earnings Beginning Balance (A) Prior To Previous Year Dierence Net Of Tax (14.1.19) (B) [(A) (B)] (C) Previous Year New Net Income (14.1.12) (D) Previous Year Dividends (E) [(C) + (D) (E)] (F) 20X5 819 207 1,026 195 40 1,181

(F) Current Year Net Income (14.1.14) (G) Current Year Dividends (H) (F) + (G) (H) 20X6

1,181 210 40 1,351

Retained Earnings balance 01/01/X4 700 12/31/X4 119 12/31/X5 122 01/01/X6 240 12/31/X6 170 1 balance 1,351

14.2

Change from Completed-contract to Percentage-of-completion

Example 106, 20X5: Principle change = from completed-contract revenue method to percentage-of-completion. Pretax income from inception to end of 20X4 using completed-contract method = $400,000. Pretax income from inception to end of 20X4 using percentage-of-completion method = $600,000. Pretax income in 20X4 using completed-contract method = $160,000. Pretax income in 20X4 using percentage-of-completion method = $180,000. Pretax income in 20X5 using percentage-of-completion method = $200,000. Retained Earnings Beginning Balance 20X4 = 1,600,000. Shares outstanding = 100,000. Tax eect = 0.40. Show the journal entry. Show the Income Statement presentation. Show the Retained Earnings presentation. Solution 106: 1. New Method Total Pretax Income Prior To Previous Year (14.1.2) New Method Total Pretax Income Prior To Previous Year = $600,000
1 Net

Income 20X6 Dividends = 210 40 = 170

14.2. CHANGE FROM COMPLETED-CONTRACT TO PERCENTAGE-OF-COMPLETION 2. Old Method Total Pretax Income Prior To Previous Year (14.1.3) Old Method Total Pretax Income Prior To Previous Year = $400,000 3. New Method Pretax Income Previous Year (14.1.4) New Method Pretax Income Previous Year = $180,000 4. Old Method Pretax Income Previous Year (14.1.5) Old Method Pretax Income Previous Year = $160,000 5. New Method Pretax Income Current Year (14.1.6) New Method Pretax Income Current Year = $200,000 6. New Method Total Pretax Income At Beginning Current Year (14.1.7) New Method Total Pretax Income At Beginning Current Year = New Method Total Pretax Income Prior To Previous Year (14.1.2) + New Method Pretax Income Previous Year (14.1.4) New Method Total Pretax Income At Beginning Current Year = 600,000 + 180,000 = 780,000 7. Old Method Total Pretax Income At Beginning Current Year (14.1.8) Old Method Total Pretax Income At Beginning Current Year = Old Method Total Pretax Income Prior To Previous Year (14.1.3) + Old Method Pretax Income Previous Year (14.1.5) Old Method Total Pretax Income At Beginning Current Year = 400,000 + 160,000 = 560,000 8. Total Pretax Income Dierence (14.1.9) Total Pretax Income Dierence = New Method Total Pretax Income At Beginning Current Year (14.1.7) Old Method Total Pretax Income At Beginning Current Year (14.1.8) Total Pretax Income Dierence = 780,000 560,000 = 220,000 9. Income Dierence Tax Eect (14.1.10) Income Dierence Tax Eect = Total Pretax Income Dierence (14.1.9) Eective Tax Rate Income Dierence Tax Eect = 220,000 0.40 = 88,000 10. Income Eect Net Of Tax (14.1.11) Income Eect Net Of Tax = Total Pretax Income Dierence (14.1.9) Income Dierence Tax Eect (14.1.10) Income Eect Net Of Tax = 220,000 88,000 = 132,000

241

11. Journal Entry, If Construction Project and Total Pretax Income Dierence > 0 Debit Credit 12/31/XX Construction in Process Total Pretax Income Dierence (14.1.9) Deferred Tax Liability Income Dierence Tax Eect (14.1.10) Retained Earnings Income Eect Net Of Tax (14.1.11) Debit Credit 01/01/X5 Construction in Process 220,000 Deferred Tax Liability 88,000 Retained Earnings 132,000 12. Previous Year New Net Income (14.1.12) Previous Year New Net Income = New Method Pretax Income Previous Year (14.1.4) [New Method Pretax Income Previous Year (14.1.4) Eective Tax Rate]

242

CHAPTER 14. ACCOUNTING CHANGES AND ERROR CORRECTION EXAMPLES Previous Year New Net Income = 180,000 [180,000 0.40] = 108,000

13. Previous Year New Earnings Per Share (14.1.13) Previous Year New Earnings Per Share = Previous Year New Net Income (14.1.12) Shares Outstanding Previous Year New Earnings Per Share = 108,000 100,000 = 1.08 14. Current Year Net Income (14.1.14) Current Year Net Income = New Method Pretax Income Current Year (14.1.6) [New Method Pretax Income Current Year (14.1.6) Eective Tax Rate] Current Year Net Income = 200,000 [200,000 0.40] = 120,000 15. Current Year Earnings Per Share (14.1.15) Current Year Earnings Per Share = Current Year Net Income (14.1.14) Shares Outstanding Current Year Earnings Per Share = 120,000 100,000 = 1.20 16. Retrospective Approach: Income Statement Summary Presentation (14.1.16) Current Year Previous Year Net Income Current Year Net Income (14.1.14) Previous Year New Net Income (14.1.12) Earnings Per Share Current Year Earnings Per Share (14.1.15) Previous Year New Earnings Per Share (14.1.13) 20X5 20X4 Net Income $120,000 $108,000 Earnings Per Share $1.20 $1.08 17. Prior To Previous Year Dierence (14.1.17) Prior To Previous Year Dierence = New Method Total Pretax Income Prior To Previous Year (14.1.2) Old Method Total Pretax Income Prior To Previous Year (14.1.3) Prior To Previous Year Dierence = 600,000 400,000 = 200,000 18. Prior To Previous Year Dierence Tax Eect (14.1.18) Prior To Previous Year Dierence Tax Eect = Prior To Previous Year Dierence (14.1.17) Eective Tax Rate Prior To Previous Year Dierence Tax Eect = 200,000 0.40 = 80,000 19. Prior To Previous Year Dierence Net Of Tax (14.1.19) Prior To Previous Year Dierence Net Of Tax = Prior To Previous Year Dierence (14.1.17) Prior To Previous Year Dierence Tax Eect (14.1.18) Prior To Previous Year Dierence Net Of Tax = 200,000 80,000 = 120,000 20. Retrospective Approach: Statement of Retained Earnings Presentation (14.1.20)

14.3. EXPENSE OMISSION Current Year Retained Earnings, Beginning Cumulative Eect of New Accounting Method Adjusted Retained Earnings, Beginning Add: Net Income Retained Earnings, Ending Retained Earnings, Beginning Cumulative Eect of New Accounting Method Adjusted Retained Earnings, Beginning Add: Net Income Retained Earnings, Ending Previous Year Retained Earnings Beginning Balance (A) Prior To Previous Year Dierence Net Of Tax (14.1.19) (B) [(A) (B)] (C) Previous Year New Net Income (14.1.12) (D) [(C) + (D)] (E) 20X4 1,600,000 120,000 1,720,000 108,000 1,828,000

243

(E) Current Year Net Income (14.1.14) (F) (E) + (F) 20X5

1,828,000 120,000 1,948,000

14.3

Expense Omission

Example 107, Error Correction 20X5: Expense Omission = $20,000 depreciation expense. Retained Earnings, 1/1/X5 = 350,000 Net Income, 20X5 = 400,000 Tax eect = 0.40. Show the journal entry. Show the Retained Earnings Statement. Solution 107:

1. Retained Earnings Correction (14.4.2) Retained Earnings Correction = Expense Omission (1 Eective Tax Rate) Retained Earnings Correction = 20,000 (1 0.40) = 12,000

2. Deferred Tax Liability Correction (14.4.3) Deferred Tax Liability Correction = Expense Omission Eective Tax Rate Deferred Tax Liability Correction = 20,000 0.40 = 8,000

3. Retained Earnings Journal Entry XX/XX/XX Retained Earnings Deferred Tax Liability Contra-Asset/Liabilityitem (14.4.1) Debit Retained Earnings 12,000 Deferred Tax Liability 8,000 Accumulated Depreciation Debit Retained Earnings Correction (14.4.2) Deferred Tax Liability Correction (14.4.3) Credit Credit

Expense Omission

XX/XX/X5

20,000

4. Statement of Retained Earnings Presentation

244

CHAPTER 14. ACCOUNTING CHANGES AND ERROR CORRECTION EXAMPLES

Retained Earnings, 1/1/XX Correction of an Error Less: Tax Reduction Adjusted Retained Earnings, 1/1/XX Add: Net Income Retained Earnings, 12/31/XX Retained Earnings, 1/1/X5 Correction of an Error Less: Tax Reduction Adjusted Retained Earnings, 1/1/X5 Add: Net Income Retained Earnings, 12/31/X5 Error Correction (1) Deferred Tax Liability Correction (14.4.3) (2)

Retained Earnings Beginning Balance (A) [(1) (2)] (B) [(A) (B)] (C) Net Income (C) + Net Income $350,000 $20,000 8,000 (12,000) 338,000 400,000 $738,000

Chapter 15

State and Local General Governmental Fund Examples


15.1 General Funds: Simple

Example 108: City of Greenburg 1. The City Council approved an appropriation on 9/1/X7 for $10,000. 2. The Mayor submitted purchase order #1 to a vendor to buy equipment on 9/3/X7 for $1,500. 3. A partial shipment was received for purchase order #1 on 9/15/X7. The invoice amount due on the partial shipment is $1,250. However, one line-item was underestimated to cost $1,000. It will now cost $1,250. Therefore, the total due for the entire purchase order is now $1,750. 4. The City Council approved a supplemental appropriation for the extra $250. 5. The Mayor vouched for the sending the vendor a check for $1,250 on 9/17/X7. 6. An emergency purchase was made for a water leak repair for $500 on 9/18/X7. 7. The Mayor submitted purchase order #2 to a vendor to buy equipment on 9/18/X7 for $500. 8. A partial shipment was received for purchase order #2 on 9/20/X7. The invoice amount due on the partial shipment is $300. 9. The Mayor submitted purchase order #3 to a vendor to buy equipment on 9/20/X7 for $750. 10. A partial shipment was received for purchase order #3 on 9/25/X7. The invoice amount due on the partial shipment is $500. However, only $450 worth of the items received are usable. Therefore, the expenditure is $450. Prepare all of the journal entries for these transactions. What is the Unencumbered Unexpended Appropriations? Prepare the Appropriations Reconciliation. Solution 108: 1. Recognizing Appropriations (15.4.11) XX/XX/XX Debit Fund Balance (15.2.7) Budget Total Appropriations (15.4.1) Debit Credit Fund Balance 10,000 Appropriations 10,000 Credit Budget Total

09/01/X7 Ledger

Appropriations 09/01/X7 10,000 (15.4.11) balance 10,000 245

246

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES

2. Make a Purchase (15.4.13): Purchase Order #1 XX/XX/XX Debit Encumbrancesyear (15.4.2) Amount Reserve for Encumbrances (15.4.7) Debit Credit Encumbrances20X 7 (15.4.2) 1,500 Reserve for Encumbrances 1,500 Credit Amount

09/03/X7 Ledger

Encumbrances20X 7 09/03/X7 1,500 (15.4.13) balance 1,500 3. Received Items Purchased; Reverse the Encumbrance (15.4.14): Purchase Order #1 Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment and a price uctuation then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 1,000 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 09/15/X7 Reserve for Encumbrances 1,000 Encumbrances20X 7 1,000 Ledger Encumbrances20X 7 09/03/X7 1,500 (15.4.13) 09/15/X7 1,000 (15.4.14) balance 500 4. Received Items Purchased; Record the Expenditure (15.4.15): Purchase Order #2 Debit Credit XX/XX/XX Expendituresyear (15.4.3) Invoice Total Vouchers/Other Funds/Federal Government Payable Invoice Total Debit Credit 09/15/X7 Expenditures20X 7 1,250 Vouchers Payable 1,250 Ledger Expenditures20X 7 09/15/X7 1,250 (15.4.15) balance 1,250 5. Recognizing a Supplemental Appropriation (15.4.11) Debit Credit XX/XX/XX Fund Balance (15.2.7) Budget Total Appropriations (15.4.1) Budget Total Debit Credit 09/15/X7 Fund Balance 250 Appropriations 250 Ledger Appropriations 09/01/X7 10,000 (15.4.11) 09/15/X7 250 (15.4.11) balance 10,250 6. Paying the Vendor (15.4.16 XX/XX/XX Vouchers/Other Funds/Federal Government Payable Cash Debit Invoice Total Credit Invoice Total

15.1. GENERAL FUNDS: SIMPLE Debit 1,250 Credit 1,250

247

09/17/X7

Vouchers Payable Cash

7. Make an Emergency Purchase (15.4.17) XX/XX/XX Debit Expendituresyear (15.4.3) Emergency Amount Cash Debit Credit Expenditures20X 7 500 Cash 500 Credit Emergency Amount

09/18/X7 Ledger

Expenditures20X 7 09/15/X7 1,250 (15.4.15) 09/18/X7 500 (15.4.17) balance 1,750 8. Make a Purchase (15.4.13): Purchase Order #2 XX/XX/XX Debit Encumbrancesyear (15.4.2) Amount Reserve for Encumbrances (15.4.7) Debit Credit Encumbrances20X 7 (15.4.2) 500 Reserve for Encumbrances 500 Credit Amount

09/18/X7 Ledger

Encumbrances20X 7 09/03/X7 1,500 (15.4.13) 09/15/X7 1,000 (15.4.14) 09/18/X7 500 (15.4.13) balance 1,000 9. Received Items Purchased; Reverse the Encumbrance (15.4.14): Purchase Order #2 Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 300 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 09/20/X7 Reserve for Encumbrances 300 Encumbrances20X 7 300 Ledger Encumbrances20X 7 09/03/X7 1,500 (15.4.13) 09/15/X7 1,000 (15.4.14) 09/18/X7 500 (15.4.13) 09/20/X7 300 (15.4.14) balance 700 10. Received Items Purchased; Record the Expenditure (15.4.15): Purchase Order #2 Debit Credit XX/XX/XX Expendituresyear (15.4.3) Invoice Total Vouchers/Other Funds/Federal Government Payable Invoice Total Debit Credit 09/20/X7 Expenditures20X 7 300 Vouchers Payable 300 Ledger

248

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Expenditures20X 7 09/15/X7 1,250 (15.4.15) 09/18/X7 500 (15.4.17) 09/20/X7 300 (15.4.15) balance 2,050

11. Make a Purchase (15.4.13): Purchase Order #3 XX/XX/XX Debit Encumbrancesyear (15.4.2) Amount Reserve for Encumbrances (15.4.7) Debit Credit Encumbrances20X 7 (15.4.2) 750 Reserve for Encumbrances 750 Credit Amount

09/20/X7 Ledger

Encumbrances20X 7 09/03/X7 1,500 (15.4.13) 09/15/X7 1,000 (15.4.14) 09/18/X7 500 (15.4.13) 09/20/X7 300 (15.4.14) 09/20/X7 750 (15.4.13) balance 1,450 12. Received Items Purchased; Reverse the Encumbrance (15.4.14): Purchase Order #3 Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 500 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 09/25/X7 Reserve for Encumbrances 500 Encumbrances20X 7 500 Ledger Encumbrances20X 7 09/03/X7 1,500 (15.4.13) 09/15/X7 1,000 (15.4.14) 09/18/X7 500 (15.4.13) 09/20/X7 300 (15.4.14) 09/20/X7 750 (15.4.13) 09/25/X7 500 (15.4.14) balance 950 13. Received Items Purchased; Record the Expenditure (15.4.15): Purchase Order #3 Debit Credit XX/XX/XX Expendituresyear (15.4.3) Invoice Total Vouchers/Other Funds/Federal Government Payable Invoice Total Debit Credit 09/25/X7 Expenditures20X 7 450 Vouchers Payable 450 Ledger Expenditures20X 7 09/15/X7 1,250 (15.4.15) 09/18/X7 500 (15.4.17) 09/20/X7 300 (15.4.15) 09/25/X7 450 (15.4.15) balance 2,500 14. Unencumbered Unexpended Appropriations (15.7.1)

15.2. GENERAL FUNDS: COMPREHENSIVE Unencumbered Unexpended Appropriations = + Appropriations (15.4.1) credit balance Encumbrancesyear (15.4.2) debit balance Expendituresyear (15.4.3) debit balance Unencumbered Unexpended Appropriations = 10,250 950 2,500 = 6,800 15. Appropriations Reconciliation (15.7.2) + Encumbrancesyear (15.4.2) debit balance + Expendituresyear (15.4.3) debit balance + Available Appropriations (15.7.1) = Appropriations (15.4.1) credit balance + 950 + 2,500 + 6,800 = 10,250

249

15.2

General Funds: Comprehensive

Example 109 General Fund Transactions: Town of Brighton: 20X8 0a) Fund Balance Beginning Balance = $491,400. 0b) Inventory of Supplies Beginning Balance = $61,500. 0c) Reserve for Inventory of Supplies Beginning Balance = $61,500. 0d) Cash Beginning Balance = $220,000. 0e) Vouchers Payable Beginning Balance = $320,000. 0f) Federal Government Payable Beginning Balance = $90,000. 0g) Taxes ReceivableDelinquent Beginning Balance = $660,000. 0h) Estimated Uncollectible Delinquent Taxes Beginning Balance = $50,000. 0i) Interest/Penalties Receivable Beginning Balance = $13,200. 0j) Estimated Uncollectible Interest/Penalties Beginning Balance = $3,300. 0k) Estimated Uncollectible Percent = 0.04. 1a) Property Tax Receivable Amount for year = $2,708,333. 1b) Property Tax Collection for year = $2,042,033. 1c) Estimated Non-Property Tax Revenue for year = $1,386,000. 1d) Appropriations = $4,180,000. 1e) Estimated Other Financing Uses = $91,500 2) Transfer out the entire Inventory of Supplies and $30,000 to a newly created Supplies Internal Fund. Note: do not create the new fund. 3a) The Mayors oce submitted a requisition to the supply fund for supplies estimated at $247,360. 3b) The Mayors oce submitted a purchase order to a vendor for additional supplies estimated at $59.090. 4a) The supplies fund delivered the requested supplies; however, the actual cost was $249,750. 4b) The vendor partially delivered $22,415 of the requested supplies; however, the actual cost was $19,700. 5a) Pay the $339,700 Vouchers Payable. 5b) Pay the $249,750 Other Funds Payable. 5c) Pay the $90,000 Federal Government Payable. Requirement: Prepare all of the journal entries for these transactions. Solution 109: 1. Beginning Balances Fund Balance 0a/X8 491,400 (opening) Inventory of Supplies 0b/X8 61,500 (opening) Reserve for Inventory of Supplies 0c/X8 61,500 (opening) Cash 0d/X8 220,000 (opening)

250

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Vouchers Payable 0e/X8 320,000 (opening) Federal Government Payable 0f/X8 90,000 (opening) Taxes ReceivableDelinquent 0g/X8 660,000 (opening) Estimated Uncollectible Delinquent Taxes 0h/X8 50,000 (opening) Interest/Penalties Receivable 0i/X8 13,200 (opening) Estimated Uncollectible Interest/Penalties 0j/X8 3,300 (opening)

2. Property Taxes Receivable Amount (15.3.6) Let n = the number of property parcels. n Property Taxes Receivable Amount = i=1 Property Parcel Tax Assessmenti Property Taxes Receivable Amount = 2,708,333 3. Property Taxes Revenue Amount (15.3.9) Property Taxes Revenue Amount = Property Taxes Receivable Amount (15.3.6) (1 Estimated Uncollectible Percent) Property Taxes Revenue Amount = 2,708,333 (1 0.04) = 2,600,000 4. Property Taxes Estimated Revenue Journal Entry (15.3.10) Debit Credit 01/01/XX Estimated Revenues (15.3.1) (15.3.9) Fund Balance (15.2.7) (15.3.9) Debit Credit 1a/X8 Estimated Revenues 2,600,000 Fund Balance 2,600,000 Ledgers Fund Balance 0a/X8 491,400 (opening) 1a/X8 2,600,000 (15.3.9) balance 3,091,400 Estimated Revenues 1a/X8 2,600,000 (15.3.9) balance 2,600,000 5. Uncollectible Property Taxes Amount (15.3.11) Uncollectible Property Taxes Amount = Property Taxes Receivable Amount (15.3.6) Estimated Uncollectible Percent Uncollectible Property Taxes Amount = 2,708,333 0.04 = 108,333 6. Property Taxes Actual Revenue Journal Entry (15.3.12) Debit Credit 01/01/XX Taxes ReceivableCurrent (15.3.7) (15.3.6) Estimated UncollectibleCurrent (15.3.8) (15.3.11) Actual Revenues (15.3.4) (15.3.9) Debit Credit 1a/X8 Taxes ReceivableCurrent 2,708,333 Estimated UncollectibleCurrent 108,333 Actual Revenues (15.3.4) 2,600,000 Ledgers Taxes ReceivableCurrent 1a/X8 2,708,333 (15.3.6) balance 2,708,333

15.2. GENERAL FUNDS: COMPREHENSIVE Estimated UncollectibleCurrent 1a/X8 108,333 (15.3.11) balance 108,333 Actual Revenues 1a/X8 2,600,000 (15.3.9) balance 2,600,000 7. Property Tax Collection (15.3.13) XX/XX/XX Cash Taxes ReceivableCurrent Debit Amount Credit Amount Credit 2,042,333

251

1b/X8 Ledgers

Cash Taxes ReceivableCurrent

Debit 2,042,333

Cash 0d/X8 220,000 (opening) 1b/X8 2,042,333 (15.3.13) balance 2,262,333 Taxes ReceivableCurrent 1a/X8 2,708,333 (15.3.9) 1b/X8 2,042,333 (15.3.13) balance 666,000 8. Estimated Non-Property Tax Revenue Amount (15.3.2) Estimated Non-Property Tax Revenue Amount = + Estimated Interest/Penalties on Delinquencies + Estimated Sales Taxes + Estimated Corporate Taxes + Estimated Licenses + Estimated Permits + Estimated Fines + Estimated Forfeits + Estimated Intergovernmental Revenue + Estimated Fees for Services + Estimated Miscellaneous Revenue Estimated Non-Property Tax Revenue Amount = 1,386,000 Debit Credit 01/01/XX Estimated Revenues (15.3.1) (15.3.2) Fund Balance (15.2.7) (15.3.2) Debit Credit 1c/X8 Estimated Revenues 1,386,000 Fund Balance 1,386,000 Ledgers Fund Balance 0a/X8 491,400 (opening) 1a/X8 2,600,000 (15.3.9) 1c/X8 1,386,000 (15.3.2) balance 4,477,400 Estimated Revenues 1a/X8 2,600,000 (15.3.9) 1c/X8 1,386,000 (15.3.2) balance 3,986,000 9. Recognizing Appropriations (15.4.11) XX/XX/XX Fund Balance (15.2.7) Appropriations (15.4.1) Debit Budget Total Credit Budget Total

252

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Debit 4,180,000 Credit 4,180,000

1d/X8 Ledgers

Fund Balance Appropriations

Appropriations 1d/X8 4,180,000 (15.4.11) balance 4,180,000 Fund Balance 0a/X8 491,400 (opening) 1a/X8 2,600,000 (15.3.9) 1c/X8 1,386,000 (15.3.2) 1d/X8 4,180,000 (15.4.11) balance 297,400 10. Estimating Transfers Out To Other Funds (15.4.10) XX/XX/XX Debit Fund Balance (15.2.7) Estimation Estimated Other Financing Uses (15.4.4) Debit Credit Fund Balance 91,500 Estimated Other Financing Uses 91,500 Estimated Other Financing Uses 1e/X8 91,500 (15.4.10) balance 91,500 Fund Balance 0a/X8 491,400 (opening) 1a/X8 2,600,000 (15.3.9) 1c/X8 1,386,000 (15.3.2) 1d/X8 4,180,000 (15.4.11) 1e/X8 91,500 (15.4.10) balance 205,900 11. Supplies Internal Service Fund (15.5.1) and (15.4.5) Debit Credit XX/XX/XX Interfund Transfer Out (15.4.5) Amount Inventory of Supplies (15.4.9) Amount Debit Credit XX/XX/XX Reserve for Supplies (15.4.8) Amount Fund Balance (15.2.7) Amount Debit Credit 2/X8 Interfund Transfer Out 61,500 Inventory of Supplies 61,500 Debit Credit 2/X8 Interfund Transfer Out 30,000 Cash 30,000 Debit Credit 2/X8 Reserve for Supplies 61,500 Fund Balance 61,500 Ledgers Inventory of Supplies 0b/X8 61,500 (opening) 2/X8 61,500 (15.5.1) balance 0 Reserve for Inventory of Supplies 0c/X8 61,500 (opening) 2/X8 61,500 (15.5.1) balance 0 Credit Estimation

1e/X8 Ledgers

15.2. GENERAL FUNDS: COMPREHENSIVE Fund Balance 0a/X8 491,400 (opening) 1a/X8 2,600,000 (15.3.9) 1c/X8 1,386,000 (15.3.2) 1d/X8 4,180,000 (15.4.11) 1e/X8 91,500 (15.4.10) 2/X8 61,500 (15.5.1) balance 266,400 Interfund Transfer Out 2/X8 61,500 (15.5.1) 2/X8 30,000 (15.5.1) balance 91,500 Cash 0d/X8 220,000 (opening) 1b/X8 2,042,333 (15.3.13) 2/X8 30,000 (15.5.1) balance 2,292,333

253

12. Make a Purchase: Journal Entry (15.4.13) XX/XX/XX Encumbrancesyear (15.4.2) Reserve for Encumbrances (15.4.7) Debit Credit Encumbrances20X 8 247,360 Reserve for Encumbrances 247,360 Debit Credit Encumbrances20X 8 59,090 Reserve for Encumbrances 59,090 Debit (15.4.12) Credit (15.4.12)

3a/X8

3b/X8 Ledgers

Encumbrances20X 8 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) balance 306,450 Reserve for Encumbrances 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) balance 306,450

13. Received Items Purchased; Reverse the Encumbrance (15.4.14) 4a Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 247,360 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 4a/X8 Reserve for Encumbrances 247,360 Encumbrances20X 8 247,360 Ledgers Encumbrances20X 8 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) 4a/X8 247,360 (15.4.14) balance 59,090

254

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Reserve for Encumbrances 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) 4a/X8 247,360 (15.4.14) balance 59,090

14. Received Items Purchased; Reverse the Encumbrance (15.4.14) 4b Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment and a price uctuation then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 22,415 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 4b/X8 Reserve for Encumbrances 22,415 Encumbrances20X 8 22,415 Ledgers Encumbrances20X 8 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) 4a/X8 247,360 (15.4.14) 4b/X8 22,415 (15.4.14) balance 36,675 Reserve for Encumbrances 3a/X8 247,360 (15.4.13) 3b/X8 59,090 (15.4.13) 4a/X8 247,360 (15.4.14) 4b/X8 22,415 (15.4.14) balance 36,675

15. Received Items Purchased; Record the Expenditure (15.4.15) 4a XX/XX/XX Expendituresyear (15.4.3) Vouchers/Other Funds/Federal Government Payable Debit Credit Expenditures20X 8 249,750 Other Funds Payable 249,750 Expenditures20X 8 3a/X8 249,750 (15.4.15) balance 249,750 Other Funds Payable 3a/X8 249,750 (15.4.15) balance 249,750 Debit Invoice Total Credit Invoice Total

4a/X8 Ledgers

16. Received Items Purchased; Record the Expenditure (15.4.15) 4b XX/XX/XX Expendituresyear (15.4.3) Vouchers/Other Funds/Federal Government Payable Debit Credit Expenditures20X 8 19,700 Vouchers Payable 19,700 Debit Invoice Total Credit Invoice Total

4b/X8 Ledgers

15.2. GENERAL FUNDS: COMPREHENSIVE Expenditures20X 8 3a/X8 249,750 (15.4.15) 3b/X8 19,700 (15.4.15) balance 269,450 Vouchers Payable 0e/X8 320,000 (opening) 4b/X8 19,700 (15.4.15) balance 339,700 17. Paying the Vendor (15.4.16) 5a, 5b, 5c XX/XX/XX Vouchers/Other Funds/Federal Government Payable Cash Debit Credit Vouchers Payable 339,700 Other Funds Payable 249,750 Federal Government Payable 90,000 Cash 679,450 Vouchers Payable 0e/X8 320,000 (opening) 4b/X8 19,700 (15.4.15) 5a/X8 339,700 (15.4.16) balance 0 Other Funds Payable 3a/X8 249,750 (15.4.15) 5b/X8 249,750 (15.4.16) balance 0 Federal Government Payable 0f/X8 90,000 (opening) 5c/X8 90,000 (15.4.16) balance 0 Cash 0d/X8 220,000 (opening) 1b/X8 2,042,333 (15.3.13) 2/X8 30,000 (15.5.1) 5/X8 679,450 (15.4.16) balance 1,612,883 18. Delinquent Property Taxes Amount (15.6.1) Delinquent Property Taxes Amount = Taxes ReceivableCurrent (15.3.7) Year-end Balance Delinquent Property Taxes Amount = 666,000 19. Close Taxes ReceivableCurrent (15.8.1) 12/31/XX Taxes ReceivableDelinquent Taxes ReceivableCurrent Taxes ReceivableDelinquent Taxes ReceivableCurrent Debit (15.6.1) Debit 666,000 Credit (15.6.1) Credit 666,000 Credit (15.3.8) Balance Debit Invoice Total Credit Invoice Total

255

5/XX

Ledgers

12/31/X8

20. Close Estimated UncollectibleCurrent (15.8.2) 12/31/XX Debit Estimated UncollectibleCurrent (15.3.8) (15.3.8) Balance Estimated UncollectibleDelinquent Debit Credit Estimated UncollectibleCurrent 108,333 Estimated UncollectibleDelinquent 108,333

12/31/X8

256

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES

15.3

Closing Entries

Example 110: Closing Entries Year 20X8 (in $thousands) 0a) Fund Balance Beginning Balance = 700. 0b) Vouchers Payable Beginning Balance = 300. 0c) Cash Beginning Balance = 1,000. 1) Estimated Non-Property Tax Revenues = 2,500. 2) Appropriations = 2,300. 3) Issued Purchase Orders estimated cost = 2,200. 4a) Orders received estimated cost = 2,000. 4b) Orders received invoice total = 2,200. 5) Revenue collected = 2,600. 6) Invoices paid = 2,300. Prepare all of the journal entries for these transactions. What is the Unencumbered Unexpended Appropriations? Prepare the Appropriations Reconciliation. Close the budgetary accounts. Prepare a Trial Balance. Close the nominal accounts. Prepare a Trial Balance. Reverse Encumbrance20X 8 . Prepare a Trial Balance. Solution 110: 1. Beginning Balances Fund Balance 0a/X8 700 (opening) Vouchers Payable 0b/X8 300 (opening) Cash 0c/X8 1,000 (opening) 2. Estimated Non-Property Tax Revenue Amount (15.3.2) Estimated Non-Property Tax Revenue Amount = + Estimated Interest/Penalties on Delinquencies + Estimated Sales Taxes + Estimated Corporate Taxes + Estimated Licenses + Estimated Permits + Estimated Fines + Estimated Forfeits + Estimated Intergovernmental Revenue + Estimated Fees for Services + Estimated Miscellaneous Revenue Estimated Non-Property Tax Revenue Amount = 2,500 Debit Credit 01/X8 Estimated Revenues (15.3.1) 2,500 Fund Balance (15.2.7) 2,500 Ledgers Fund Balance 0a/X8 700 (opening) 01/X8 2,500 (15.3.1) balance 3,200 Estimated Revenues 01/X8 2,500 (15.3.1) balance 2,500 3. Recognizing Appropriations (15.4.11)

15.3. CLOSING ENTRIES Debit Fund Balance (15.2.7) Budget Total Appropriations (15.4.1) Debit Credit Fund Balance 2,300 Appropriations 2,300 Credit Budget Total

257

XX/XX/XX

02/X8 Ledgers

Fund Balance 0a/X8 700 (opening) 01/X8 2,500 (15.3.1) 02/X8 2,300 (15.4.1) balance 900 Appropriations 02/X8 2,300 (15.4.1) balance 2,300 4. Make a Purchase: Journal Entry (15.4.13) XX/XX/XX Encumbrancesyear (15.4.2) Reserve for Encumbrances (15.4.7) Debit Credit Encumbrances20X 8 2,200 Reserve for Encumbrances 2,200 Debit (15.4.12) Credit (15.4.12)

03/X8 Ledgers

Encumbrances20X 8 03/X8 2,200 (15.4.13) balance 2,200 Reserve for Encumbrances 03/X8 2,200 (15.4.13) balance 2,200 5. Received Items Purchased; Reverse the Encumbrance (15.4.14) Since Invoice Total <> Purchase Total (15.4.12) because of a partial shipment and a price uctuation then: Let n = the number of line-items received. n Encumbrance Reversal = i=1 line-item received estimated costi Encumbrance Reversal = 2,000 Debit Credit XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrance Reversal Encumbrancesyear (15.4.2) Encumbrance Reversal Debit Credit 4a/X8 Reserve for Encumbrances 2,000 Encumbrances20X 8 2,000 Ledgers Encumbrances20X 8 03/X8 2,200 (15.4.13) 4a/X8 2,000 (15.4.14) balance 200 Reserve for Encumbrances 03/X8 2,200 (15.4.13) 4a/X8 2,000 (15.4.14) balance 200 6. Received Items Purchased; Record the Expenditure (15.4.15) XX/XX/XX Expendituresyear (15.4.3) Vouchers/Other Funds/Federal Government Payable Debit Invoice Total Credit Invoice Total

258

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Debit 2,200 Credit 2,200

4b/X8 Ledgers

Expenditures20X 8 Vouchers Payable

Vouchers Payable 0b/X8 300 (opening) 4b/X8 2,200 (15.4.15) balance 2,500 Expenditures20X 8 4b/X8 2,200 (15.4.15) balance 2,200 7. Non-Property Tax/Fee Collection (15.3.14) Debit Credit XX/XX/XX Cash Amount Actual Revenues (15.3.4) Amount Debit Credit 05/X8 Cash 2,600 Actual Revenues 2,600 Ledgers Cash 0c/X8 1,000 (opening) 05/X8 2,600 (15.3.14) balance 3,600 Actual Revenues 05/X8 2,600 (15.3.14) balance 2,600 8. Paying the Vendor (15.4.16) XX/XX/XX Vouchers/Other Funds/Federal Government Payable Cash Debit Credit Vouchers Payable 2,300 Cash 2,300 Cash 0c/X8 1,000 (opening) 05/X8 2,600 (15.3.14) 06/X8 2,300 (15.4.16) balance 1,300 Vouchers Payable 0b/X8 300 (opening) 4b/X8 2,200 (15.4.15) 06/X8 2,300 (15.4.16) balance 200 9. Unencumbered Unexpended Appropriations (15.7.1) Unencumbered Unexpended Appropriations = + Appropriations (15.4.1) credit balance Encumbrancesyear (15.4.2) debit balance Expendituresyear (15.4.3) debit balance Unencumbered Unexpended Appropriations = + 2,300 200 2,200 = (100) 10. Close Budgetary Accounts (15.8.3) Debit Invoice Total Credit Invoice Total

06/X8 Ledgers

15.3. CLOSING ENTRIES Debit 2,300 Credit

259

12/31/X8

Appropriations (15.4.1) Fund Balance (15.2.7)

12/31/X8

12/31/X8 Ledgers

2,300 Debit Credit Fund Balance (15.2.7) 200 Encumbrances20X 8 (15.4.2) 200 Debit Credit Fund Balance (15.2.7) 2,500 Estimated Revenues (15.3.1) 2,500 Appropriations 02/X8 2,300 (15.4.1) 12/31/X8 2,300 (15.8.3) balance 0 Encumbrances20X 8 03/X8 2,200 (15.4.13) 4a/X8 2,000 (15.4.14) 12/31/X8 200 (15.8.3) balance 0 Estimated Revenues 01/X8 2,500 (15.3.1) 12/31/X8 2,500 (15.8.3) balance 0 Fund Balance 0a/X8 700 (opening) 01/X8 2,500 (15.3.1) 02/X8 2,300 (15.4.1) 12/31/X8 2,300 (15.8.3) 12/31/X8 200 (15.8.3) 12/31/X8 2,500 (15.8.3) balance 500

11. Trial Balance Account Actual Revenue Expenditures20X 8 Cash Vouchers Payable Reserve for Encumbrances Fund Balance Total

Debit 2,200 1,300

Credit 2,600

3,500

200 200 500 3,500

12. Close Nominal Accounts (15.8.4) 12/31/X8 Actual Revenues (15.3.4) Fund Balance (15.2.7) Fund Balance (15.2.7) Expenditures20X 8 (15.4.3) Debit 2,600 Debit 2,200 Credit 2,600 Credit 2,200

12/31/X8 Ledgers

Actual Revenues 05/X8 2,600 (15.3.14) 12/31/X8 2,600 (15.8.4) balance 0 Expenditures20X 8 4b/X8 2,200 (15.4.15) 12/31/X8 2,200 (15.8.4) balance 0

260

CHAPTER 15. STATE AND LOCAL GENERAL GOVERNMENTAL FUND EXAMPLES Fund Balance 0a/X8 700 (opening) 01/X8 2,500 (15.3.1) (15.4.1) 12/31/X8 2,300 (15.8.3) (15.8.3) (15.8.3) 12/31/X8 2,600 (15.8.4) (15.8.4) balance 900 Debit 1,300 Credit 200 200 900 1,300 Debit (15.4.2) Balance 1 Credit 200 Credit (15.4.2) Balance
1

02/X8 2,300 12/31/X8 200 12/31/X8 2,500 12/31/X8 2,200 13. Trial Balance Account Cash Vouchers Payable Reserve for Encumbrances Fund Balance Total

1,300

14. Reverse the Encumbrances Account (15.8.5) 01/01/XX Encumbrancesyear (15.4.2) Fund Balance (15.2.7) Debit Encumbrances20X 8 200 Fund Balance

01/01/X9 Ledgers

Encumbrances20X 8 03/X8 2,200 (15.4.13) 4a/X8 2,000 (15.4.14) 12/31/X8 200 (15.8.3) 01/01/X9 200 (15.8.5) balance 200 Fund Balance 0a/X8 700 (opening) 01/X8 2,500 (15.3.1) 02/X8 2,300 (15.4.1) 12/31/X8 2,300 (15.8.3) 12/31/X8 200 (15.8.3) 12/31/X8 2,500 (15.8.3) 12/31/X8 2,600 (15.8.4) 12/31/X8 2,200 (15.8.4) 01/01/X9 200 (15.8.5) balance 1,100 15. Trial Balance Account Cash Vouchers Payable Reserve for Encumbrances Encumbrances20X 8 Fund Balance Total Debit 1,300 Credit 200 200 200 1,500 1,100 1,500

1 Before

Close Budgetary Accounts (15.8.3).

Chapter 16

State and Local Government Capital Project Fund Examples


16.1 Comprehensive Example

Example 111, Brighton Fire Station 20X8 The Town of Brighton is using a Capital Projects Fund to manage the construction of a new Fire Station. 01) 02) 03) 04) 05) 06) 07) 08) 09) 10) 11) 12) 13) 14) The project is partially nanced by a $50,000 short-term loan from a bank. Purchase orders issued amounted to $443,000. A contract was signed with a private contractor for $1,005,000. Special engineering and miscellaneous costs were $48,000. The contractor billed Brighton for partial completion for $495,000. The project is partially nanced by a $300,000 grant from another government. Brighton paid back the $50,000 loan plus $1,000 interest. The project is partially nanced by a $1,200,000 bond issue. Brighton paid the contractor for partial completion $495,000. The items purchased in 02) were received, and the invoice of $440,000 was paid. The re station was nished, and $510,000 was billed by the contractor to Brighton. Brighton, after a nal inspection and minor aws were corrected, paid the contractor $510,000. Brighton closed the nominal accounts to Fund Balance. Brighton transfered out the Fund Balance to the Debt Service Fund.

Prepare all of the journal entries for these transactions. Solution 111: 1. Short-term Financing (16.1.4) XX/XX/XX Debit Cash Proceeds Short-term Notes Payable Debit Credit Cash 50,000 Short-term Notes Payable 50,000 Cash 01/X8 50,000 (16.1.4) balance 50,000 2. Make a Purchase: Journal Entry (16.2.1) XX/XX/XX Encumbrances (15.4.2) Reserve for Encumbrances (15.4.7) Debit Purchase Total (15.4.12) Credit Purchase Total (15.4.12) 261 Credit Proceeds

01/X8 Ledger

262

CHAPTER 16. STATE AND LOCAL GOVERNMENT CAPITAL PROJECT FUND EXAMPLES Debit 443,000 Credit 443,000 Debit Purchase Total (15.4.12) Credit 1,005,000 Credit Purchase Total (15.4.12)

02/X8

Encumbrances (15.4.2) Reserve for Encumbrances (15.4.7)

3. Make a Purchase: Journal Entry (16.2.1) XX/XX/XX Encumbrances (15.4.2) Reserve for Encumbrances (15.4.7)

03/X8

Encumbrances (15.4.2) Reserve for Encumbrances (15.4.7)

Debit 1,005,000

4. Unexpected/Miscellaneous/Insignicant Unencumbered Expenditures (16.2.6) Debit Credit XX/XX/XX Construction Expenditures (15.4.3) Amount Cash Amount Debit Credit 04/X8 Construction Expenditures (15.4.3) 48,000 Cash 48,000 Ledgers Construction Expenditures 04/X8 48,000 (16.2.6) balance 48,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) balance 2,000 5. Received Items Purchased; Reverse the Encumbrance (16.2.2) XX/XX/XX Reserve for Encumbrances (15.4.7) Encumbrances (15.4.2) Debit Reserve for Encumbrances (15.4.7) 495,000 Encumbrances (15.4.2) Debit Encumbrance Reversal (15.4.14) Credit 495,000 Credit Encumbrance Reversal (15.4.14)

05/XX

6. Revenues (16.1.1) Revenues for a Governmental Capital Project Fund include: (a) taxes raised specically for the project. (b) special assessments to property owners deemed to benet. (c) grants, entitlements, or shared revenues received by a capital projects fund from another government. (d) interest earned on investments from bond issue proceeds, if not earmarked for debt service. XX/XX/XX Debit Cash Revenue Amount Revenues Debit Credit Cash 300,000 Revenues 300,000 Credit Revenue Amount

06/X8 Ledgers

Revenues 06/X8 300,000 (16.1.1) balance 300,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) balance 302,000

16.1. COMPREHENSIVE EXAMPLE 7. Make an Interest Payment (16.2.5) Interest Expenditures (15.4.3) Cash Retire the Short-term Note (16.2.7) XX/XX/XX Short-term Notes Payable Cash XX/XX/XX Debit Interest Payment Credit Interest Payment Credit

263

Debit Principal Debit 1,000 50,000

Principal Credit

07/XX

Interest Expenditures (15.4.3) Short-term Notes Payable Cash

51,000

Ledger Interest Expenditures 07/X8 1,000 (16.2.5) balance 1,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) 07/X8 51,000 (16.2.5) and (16.2.7) balance 251,000 8. Proceeds from Bonds Issued (16.1.3) XX/XX/XX Cash Other Financing Sources Bond Proceeds (15.3.16) Debit Proceeds Credit

08/X8 Ledgers

Cash Other Financing Sources Bond Proceeds (15.3.16)

Debit 1,200,000

Proceeds Credit 1,200,000

Other Financing Sources Bond Proceeds 08/X8 1,200,000 (16.1.3) balance 1,200,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) 07/X8 51,000 (16.2.5) and (16.2.7) 06/X8 300,000 (16.1.1) 08/X8 1,200,000 (16.1.3) balance 1,451,000 9. Received Items Purchased; Record the Expenditure (16.2.3) Debit Credit XX/XX/XX Construction Expenditures (15.4.3) Invoice Total Cash or Vouchers Payable Invoice Total Debit Credit 09/XX Construction Expenditures (15.4.3) 495,000 Vouchers Payable 495,000 Ledger Construction Expenditures 04/X8 48,000 (16.2.6) 09/X8 495,000 (16.2.3) balance 543,000 10. Paying the Vendor (16.2.4)

264

CHAPTER 16. STATE AND LOCAL GOVERNMENT CAPITAL PROJECT FUND EXAMPLES Debit Credit Vouchers Payable Invoice Total Cash Invoice Total Debit Credit Vouchers Payable 495,000 Cash 495,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) 07/X8 51,000 (16.2.5) and (16.2.7) 06/X8 300,000 (16.1.1) 08/X8 1,200,000 (16.1.3) 09/X8 495,000 (16.2.4) balance 956,000

XX/XX/XX

09/X8

11. Received Items Purchased; Reverse the Encumbrance (16.2.2) XX/XX/XX Debit Reserve for Encumbrances (15.4.7) Encumbrance Reversal (15.4.14) Encumbrances (15.4.2) Debit Credit Reserve for Encumbrances (15.4.7) 443,000 Encumbrances (15.4.2) 443,000 Credit Encumbrance Reversal (15.4.14)

10/X8

12. Received Items Purchased; Record the Expenditure (16.2.3) Debit Credit XX/XX/XX Construction Expenditures (15.4.3) Invoice Total Cash or Vouchers Payable Invoice Total Debit Credit 10/X8 Construction Expenditures (15.4.3) 440,000 Cash 440,000 Ledgers Construction Expenditures 04/X8 48,000 (16.2.6) 09/X8 495,000 (16.2.3) 10/X8 440,000 (16.2.3) balance 983,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) 07/X8 51,000 (16.2.5) and (16.2.7) 06/X8 300,000 (16.1.1) 08/X8 1,200,000 (16.1.3) 09/X8 495,000 (16.2.4) 10/X8 440,000 (16.2.3) balance 516,000 13. Received Items Purchased; Reverse the Encumbrance (16.2.2) XX/XX/XX Debit Reserve for Encumbrances (15.4.7) Encumbrance Reversal (15.4.14) Encumbrances (15.4.2) Debit Credit Reserve for Encumbrances (15.4.7) 510,000 Encumbrances (15.4.2) 510,000 Credit Encumbrance Reversal (15.4.14)

11/X8

14. Received Items Purchased; Record the Expenditure (16.2.3)

16.1. COMPREHENSIVE EXAMPLE Debit Construction Expenditures (15.4.3) Invoice Total Cash or Vouchers Payable Debit Credit Construction Expenditures (15.4.3) 510,000 Vouchers Payable 510,000 Construction Expenditures 04/X8 48,000 (16.2.6) 09/X8 495,000 (16.2.3) 10/X8 440,000 (16.2.3) 11/X8 510,000 (16.2.3) balance 1,493,000 15. Paying the Vendor (16.2.4) XX/XX/XX Debit Credit Vouchers Payable Invoice Total Cash Invoice Total Debit Credit Vouchers Payable 510,000 Cash 510,000 Cash 01/X8 50,000 (16.1.4) 04/X8 48,000 (16.2.6) 06/X8 300,000 (16.1.1) 07/X8 51,000 (16.2.5) and (16.2.7) 06/X8 300,000 (16.1.1) 08/X8 1,200,000 (16.1.3) 09/X8 495,000 (16.2.4) 10/X8 440,000 (16.2.3) 12/X8 510,000 (16.2.4) balance 6,000 Credit Invoice Total

265

XX/XX/XX

11/X8 Ledger

12/X8

16. Close Nominal Accounts (16.3.1) Debit 13/X8 Revenues (16.1.1) 300,000 Fund Balance (15.2.7) 13/X8

Credit 300,000 Credit 1,200,000

13/X8

13/X8 Ledger

Debit Other Financing Sources Bond Proceeds (15.3.16) 1,200,000 Fund Balance (15.2.7) Debit Credit Fund Balance (15.2.7) 1,493,000 Construction Expenditures (15.4.3) 1,493,000 Debit Credit Fund Balance (15.2.7) 1,000 Interest Expenditures (15.4.3) 1,000 Fund Balance 13/X8 300,000 13/X8 1,200,000 13/X8 1,493,000 13/X8 1,000 balance 6,000

17. Transfer Out the Residual Equity (16.3.2) XX/XX/XX Other Financing Uses Interfund Transfers Out (15.4.5) Cash Debit (15.2.7) Balance Credit (15.2.7) Balance

266

CHAPTER 16. STATE AND LOCAL GOVERNMENT CAPITAL PROJECT FUND EXAMPLES Debit Fund Balance (15.4.5) Balance Other Financing Uses Interfund Transfers Out (15.4.5) Debit Credit Other Financing Uses Interfund Transfers Out (15.4.5) 6,000 Cash 6,000 Debit Credit Fund Balance 6,000 Other Financing Uses Interfund Transfers Out (15.4.5) 6,000 Credit (15.4.5) Balance

XX/XX/XX

14/X8

14/X8

Chapter 17

State and Local Government Debt Service Fund Examples


17.1 Regular Serial Bonds

Example 112, Regular Serial Bonds 20X8 The Town of Brighton is using a Debt Service Fund to manage the nancing of a new Fire Station. a) The project is partially nanced by a Regular Serial Bond (17.1) issue: 1. Term = 20 years. 2. Bond Issue Quantity = 1,200. 3. Coupon rate = 6%. 4. Coupon dates = June 15 and December 15. 5. Bonds sold at par on June 15, 20X8. b) The Estimated Residual Equity (16.3.2) is $6,000. The Fire Station is expected to be completed in 20X8. c) The bonds will be nanced by a special sales tax estimated to generate revenues of: 1. $30,000 from June 15 to December 31, 20X8. 2. $135,000 per year thereafter. 01) Record the 20X8 budgetary journal entries. 02) Sales tax receipts 20X8 = $31,200. 03) Upon completion, the Residual Equity of $6,000 was transfered in. 12/15/X8) Record the only 20X8 interest payment. 12/31/X8) Close the budgetary accounts. 12/31/X8) Close the nominal accounts. 08) Record the 20X9 budgetary journal entries. 09) Sales tax receipts 20X9 = $134,100. 06/15/X9) Record the rst 20X9 interest payment. 06/15/X9) Record the principal payment. 12/15/X9) Record the second 20X9 interest payment. 12/31/X9) Close the budgetary accounts. 12/31/X9) Close the nominal accounts. Solution 112: 1. Total Face Value (17.1.1) Total Face Value = Bond Issue Quantity $1,000 Total Face Value = 1,200 1,000 = 1,200,000 2. Bond Principal Amount (17.1.2) 20X8 Since Bond Issue Year = Current Year then: Bond Principal Amount = 0 267

268

CHAPTER 17. STATE AND LOCAL GOVERNMENT DEBT SERVICE FUND EXAMPLES

3. Estimated Revenues (17.1.3) 01/01/XX Debit Credit Estimated Revenues (17.1.3) Fund Balance (15.2.7) (17.1.3) Debit Credit Estimated Revenues 30,000 Fund Balance (15.2.7) 30,000 Estimated Revenues 1a/X8 30,000 (17.1.3) balance 30,000 Fund Balance 1a/X8 30,000 (17.1.3) balance 30,000

1a/X8 Ledgers

4. Estimating Other Financing Sources (17.1.5) Debit Credit 1b/X8 Estimated Other Financing Sources 6,000 Fund Balance (15.2.7) 6,000 Ledgers Estimated Other Financing Sources 1b/X8 6,000 (17.1.5) balance 6,000 Fund Balance 1a/X8 30,000 (17.1.3) 1b/X8 6,000 (17.1.5) balance 36,000

5. Estimated First Interest Payment Amount (17.1.6) Estimated First Interest Payment Amount = [Total Face Value (17.1.1) Principal Payment Table Total (17.1.12)] Coupon Rate 2 Estimated First Interest Payment Amount = [1,200,000 0] 0.06 2 = 36,000 6. Estimated Second Interest Payment Amount (17.1.7) Since Bond Issue Year = Current Year and less than 6 months remain in scal year: Estimated Second Interest Payment Amount = 0 7. Appropriations (17.1.8) Anticipated Principal Plus Interest = Bond Principal Amount (17.1.2) + Estimated First Interest Payment Amount (17.1.6) + Estimated Second Interest Payment Amount (17.1.7) Anticipated Principal Plus Interest = 0 + 36,000 + 0 = 36,000 Journal Entry Debit Credit 01/01/XX Fund Balance (15.2.7) (17.1.8) Appropriations (15.4.1) (17.1.8) Debit Credit 1c/X8 Fund Balance (15.2.7) 36,000 Appropriations (15.4.1) 36,000 Ledgers Appropriations 1c/X8 36,000 (17.1.8) balance 36,000

17.1. REGULAR SERIAL BONDS Fund Balance 1a/X8 30,000 (17.1.3) 1b/X8 6,000 (17.1.5) 1c/X8 36,000 (17.1.8) balance 0 8. Receive Tax Revenues (17.1.14) XX/XX/XX Debit Credit Cash Amount Actual Revenues (15.3.4) Amount Debit Credit Cash 31,200 Actual Revenues (15.3.4) 31,200 Revenues 02/X8 31,200 (17.1.14) balance 31,200 9. Receive Interfund Transfer In (17.1.15) XX/XX/XX Debit Cash Amount Other Financing SourcesInterfund Transfer In (15.3.15) Debit Credit Cash 6,000 Other Financing SourcesInterfund Transfer In (15.3.15) 6,000 Credit Amount

269

02/X8 Ledger

03/X8 Ledger

Other Financing SourcesInterfund Transfer In 03/X8 6,000 (17.1.15) balance 6,000 10. Make an Interest Payment (17.1.10) XX/XX/XX ExpenditureBond Interest Cash or Interest Payable Debit (17.1.9) Credit

(17.1.9) Debit Credit Ledger 12/15/X8 ExpenditureBond Interest 36,000 Cash 36,000 ExpenditureBond Interest 12/15/X8 36,000 (17.1.10) balance 36,000 11. Close Budgetary Accounts (17.3.3) 12/31/X8 Appropriations (15.4.1) Fund Balance (15.2.7) Debit 36,000 Credit

12/31/X8

Fund Balance (15.2.7) Estimated Revenues (15.3.1)

36,000 Debit Credit 30,000 30,000 Debit 6,000 Credit 6,000

12/31/X8

Fund Balance (15.2.7) Estimated Other Financing Sources (15.3.3) Debit 31,200 Credit

12. Close Nominal Accounts (17.3.4) 12/31/X8 Actual Revenues (15.3.4) Fund Balance (15.2.7)

12/31/X8

31,200 Debit Fund Balance (15.2.7) 36,000 ExpendituresBond Interest (15.4.3)

Credit 36,000

270

CHAPTER 17. STATE AND LOCAL GOVERNMENT DEBT SERVICE FUND EXAMPLES Debit 6,000 Credit 6,000

12/31/X8

Other Financing SourcesInterfund Transfer In (15.3.15) Fund Balance (15.2.7)

13. Bond Principal Amount (17.1.2) 20X9 Since Bond Issue Year < Current Year then: Total Face Value (17.1.1) Bond Principal Amount = Bond Term Years 1,200,000 = 60,000 Bond Principal Amount = 20 14. Estimated Revenues (17.1.3) 01/01/XX Estimated Revenues (15.3.1) Fund Balance (15.2.7) Debit (15.3.2) Credit

8a/X9 Ledgers

Estimated Revenues (15.3.1) Fund Balance (15.2.7)

Debit 135,000

(15.3.2) Credit 135,000

Estimated Revenues 8a/X9 135,000 (17.1.3) balance 135,000 Fund Balance 8a/X9 135,000 (17.1.3) balance 135,000 15. Estimated First Interest Payment Amount (17.1.6) Estimated First Interest Payment Amount = [Total Face Value (17.1.1) Principal Payment Table Total (17.1.12)] Coupon Rate 2 Estimated First Interest Payment Amount = [1,200,000 0] 0.03 = 36,000 16. Estimated Second Interest Payment Amount (17.1.7) Since Bond Issue Year > Current Year: Estimated Second Interest Payment Amount = [Total Face Value (17.1.1) (Principal Payment Table Total (17.1.12) + Bond Principal Amount (17.1.2)) ] Coupon Rate 2 Estimated Second Interest Payment Amount = [1,200,000 (0 + 60,000)] 0.03 = 34,200 17. Appropriations (17.1.8) Anticipated Principal Plus Interest = Bond Principal Amount (17.1.2) + Estimated First Interest Payment Amount (17.1.6) + Estimated Second Interest Payment Amount (17.1.7) Anticipated Principal Plus Interest = 60,000 + 36,000 + 34,200 = 130,200 Journal Entry Debit Credit 01/01/XX Fund Balance (15.2.7) (17.1.8) Appropriations (15.4.1) (17.1.8) Debit Credit 8b/X9 Fund Balance (15.2.7) 130,200 Appropriations (15.4.1) 130,200 Ledgers Appropriations 8b/X9 130,200 (17.1.8) balance 130,200 Fund Balance 8a/X9 135,000 (17.1.3) 8b/X9 130,200 (17.1.8) balance 4,800

17.1. REGULAR SERIAL BONDS 18. Interest Payment Amount (17.1.9) Interest Payment Amount = [Total Face Value (17.1.1) Principal Payment Table Total (17.1.12)] Coupon Rate 2 Interest Payment Amount = [1,200,000 0] 0.03 = 36,000 19. Make an Interest Payment (17.1.10) XX/XX/XX ExpenditureBond Interest Cash or Interest Payable ExpenditureBond Interest Cash Debit (17.1.9) Credit

271

06/15/X9 Ledger

Debit 36,000

(17.1.9) Credit 36,000

ExpenditureBond Interest 06/15/X9 36,000 (17.1.10) balance 36,000 20. Make a Principal Payment (17.1.11) XX/XX/XX ExpenditureBond Principal Cash Debit (17.1.2) Credit

ExpenditureBond Principal Cash 60,000 Note: add this payment to the Principal Payment Table (17.1.12). Ledger ExpenditureBond Principal 06/15/X9 60,000 (17.1.11) balance 60,000 21. Principal Payment Table (17.1.12) Year Principal Payment Total 20X9 60,000 60,000 22. Interest Payment Amount (17.1.9) Interest Payment Amount = [Total Face Value (17.1.1) Principal Payment Table Total (17.1.12)] Coupon Rate 2 Interest Payment Amount = [1,200,000 60,000] 0.03 = 34,200 23. Make an Interest Payment (17.1.10) XX/XX/XX ExpenditureBond Interest Cash or Interest Payable ExpenditureBond Interest Cash or Interest Payable Debit (17.1.9) Credit

06/15/X9

Debit 60,000

(17.1.2) Credit

12/15/X9 Ledger

Debit 34,200

(17.1.9) Credit 34,200

ExpenditureBond Interest 06/15/X9 36,000 (17.1.10) 12/15/X9 34,200 (17.1.10) balance 70,200 24. Close Budgetary Accounts (17.3.3) 12/31/X9 Appropriations (15.4.1) Fund Balance (15.2.7) Debit 130,200 Credit 130,200

272

CHAPTER 17. STATE AND LOCAL GOVERNMENT DEBT SERVICE FUND EXAMPLES Debit 135,000 Credit 135,000 Credit

12/31/X9

Fund Balance (15.2.7) Estimated Revenues (15.3.1)

25. Close Nominal Accounts (17.3.4) 12/31/X9 Actual Revenues (15.3.4) Fund Balance (15.2.7) Debit 134,100

12/31/X9

12/31/X9

134,100 Debit Credit Fund Balance (15.2.7) 60,000 ExpendituresBond Principal (15.4.3) 60,000 Debit Credit Fund Balance (15.2.7) 70,200 ExpendituresBond Interest (15.4.3) 70,200

17.2

Term Bonds

Example 113, Term Bonds 20X8 The Town of Brighton is using a Debt Service Fund to manage the nancing of a new Fire Station. a) The project is partially nanced by a Term Bond (17.2) issue: 1. Term = 20 years. 2. Bond Issue Quantity = 1,500. 3. Coupon rate = 5%. 4. Coupon dates = January 1 and July 1. 5. Bonds sold at par on January 1, 20X8. b) The bonds will be nanced by: 1. a property tax assessment (estimated uncollectible rate = 2.6135%). 2. sinking fund investments expected to return 6%, compounded semi-annually. 01) Record the 20X8 budgetary journal entries. 02) Record the 20X8 property tax receivable/revenue journal entry. 03) Record the rst-half 20X8 property tax receipt = $57,393.57. 04) Record the rst-half 20X8 sinking fund deposit. 05) Record the second-half 20X8 interest payment. 06) Record the second-half 20X8 required earnings. 07) Record the second-half 20X8 property tax receipt = $57,393.57. 08) Record the second-half 20X8 investment earnings = $596.81. 09) Record the second-half 20X8 sinking fund deposit. c) Prepare the end of year Trial Balance. Solution 113: 1. Total Face Value (17.1.1) Total Face Value = Bond Issue Quantity $1,000 Total Face Value = 1,500 $1,000 = $1,500,000 2. Future Value One Sinking Fund Dollar (17.2.3) Sinking Fund Rate (17.2.2) Future Value One Sinking Fund Dollar = fva[ $1, , Bond Term Years 2 ] 2 Future Value One Sinking Fund Dollar = fva[ $1, 0.03, 40 ] = 75.40126 3. Semi-Annual Sinking Fund Deposit Amount (17.2.4) Total Face Value (17.1.1) Semi-Annual Sinking Fund Deposit Amount = Future Value One Sinking Fund Dollar (17.2.3) 1,500,000 Semi-Annual Sinking Fund Deposit Amount = 75,40126 = 19,893.57

17.2. TERM BONDS 4. Semi-Annual Interest Payment Amount (17.2.5) Coupon Rate Semi-Annual Interest Payment Amount = Total Face Value (17.1.1) 2 Semi-Annual Interest Payment Amount = 1,500,000 0.05 = 37,500 2 5. Required Earnings First Half Year (17.2.7) Required Earnings First Half Year = Sinking Fund Deposit/Interest Table (17.2.6) Total Sinking Fund Rate (17.2.2) 2 = 0 Required Earnings First Half Year = 0 0.06 2 6. Required Earnings Second Half Year (17.2.8) Required Earnings Second Half Year = [ Sinking Fund Deposit/Interest Table (17.2.6) Total + Semi-Annual Sinking Fund Deposit Amount (17.2.4) + Required Earnings First Half Year (17.2.7) ] Sinking Fund Rate (17.2.2) 2 Required Earnings Second Half Year = [ 0 + 19,893.57 + 0 ] 0.06 2 = 596.81 7. Required Sinking Fund Earnings (17.2.9) Required Sinking Fund Earnings = Required Earnings First Half Year (17.2.7) + Required Earnings Second Half Year (17.2.8) Required Sinking Fund Earnings = 0 + 596.81 = 596.81 Journal Entry Debit Credit 01/01/XX Estimated Revenues (15.3.1) (17.2.9) Fund Balance (15.2.7) (17.2.9) Debit Credit 1a/X8 Estimated Revenues (15.3.1) 596.81 Fund Balance (15.2.7) 596.81 Ledgers Estimated Revenues 1a/X8 596.81 (17.2.9) balance 596.81 Fund Balance 1a/X8 596.81 (17.2.9) balance 596.81 8. Appropriations (17.2.11) Expected Interest Payments = Semi-Annual Interest Payment Amount (17.2.5) 2 Expected Interest Payments = 37,500 2 = 75,000 Journal Entry Debit Credit 01/01/XX Fund Balance (15.2.7) (17.2.11) Appropriations (15.4.1) (17.2.11) Debit Credit 1b/X8 Fund Balance 75,000 Appropriations 75,000 Ledgers Appropriations 1b/X8 75,000 (17.2.11) balance 75,000 Fund Balance 1a/X8 596.81 (17.2.9) 1b/X8 75,000 (17.2.11) balance 74,403.19 9. Necessary Annual Tax Revenues (17.2.10) Necessary Annual Tax Revenues = [ Semi-Annual Sinking Fund Deposit Amount (17.2.4) 2 ] + [ Semi-Annual Interest Payment (17.2.18) 2 ] Necessary Annual Tax Revenues = [ 19,893.57 2 ] + [ 37,500 2 ] = 114,787.14

273

274

CHAPTER 17. STATE AND LOCAL GOVERNMENT DEBT SERVICE FUND EXAMPLES

10. Property Taxes Receivable Amount (15.3.6) Property Tax Revenue Needed Property Taxes Receivable Amount = 1 Estimated Uncollectible Percent 114,787.14 Property Taxes Receivable Amount = 1 0.026135 = 117,867.61 11. Uncollectible Property Taxes Amount (15.3.11) Uncollectible Property Taxes Amount = Property Taxes Receivable Amount (15.3.6) Estimated Uncollectible Percent Uncollectible Property Taxes Amount = 117,867.61 0.026135 = 3,080.47 12. Estimated Property Tax Revenues (17.2.13) 01/01/XX Debit Credit Taxes ReceivableCurrent (15.3.7) (15.3.6) Estimated UncollectibleCurrent (15.3.8) (15.3.11) Actual Revenues (15.3.4) (17.2.10) Debit Credit Taxes ReceivableCurrent 117,867.61 Estimated UncollectibleCurrent 3,080.47 Actual Revenues 114,787.14

02/X8

Ledgers Taxes ReceivableCurrent 02/X8 117,867.61 (17.2.13) balance 117,867.61 Estimated UncollectibleCurrent 02/X8 3,080.47 (17.2.13) balance 3,080.47 Actual Revenues 02/X8 114,787.14 (17.2.13) balance 114,787.14 13. Receive Property Tax Revenues (17.2.14) XX/XX/XX Cash Taxes ReceivableCurrent Debit Amount Credit Amount Credit 57,393.57

03/X8 Ledgers

Cash Taxes ReceivableCurrent

Debit 57,393.57

Taxes ReceivableCurrent 02/X8 117,867.61 (17.2.13) 03/X8 57,393.57 (17.2.14) balance 60,474.04 Cash 03/X8 57,393.57 (17.2.14) balance 57,393.57 14. Semi-Annual Sinking Fund Deposit (17.2.17) Debit Credit Sinking Fund Investments (17.2.1) (17.2.4) Cash (17.2.4) Debit Credit 04/X8 Sinking Fund Investments 19,893.57 Cash 19,893.57 Note: add this payment to the Sinking Fund Deposit/Interest Table (17.2.6). Ledgers Sinking Fund Investments 04/X8 19,893.57 (17.2.17) balance 19,893.57 XX/XX/XX

17.2. TERM BONDS Cash 03/X8 57,393.57 (17.2.14) 04/X8 19,893.57 (17.2.17) balance 37,500.00 15. Sinking Fund Deposit/Interest Table (17.2.6) Date Deposit Interest Total 04/X8 19,893.57 19,893.57 16. Semi-Annual Interest Payment (17.2.18) XX/XX/XX Debit ExpendituresBond Interest (15.4.3) (17.2.5) Cash Debit Credit ExpendituresBond Interest 37,500 Cash 37,500 ExpendituresBond Interest 05/X8 37,500 (17.2.18) balance 37,500.00 Cash 03/X8 57,393.57 (17.2.14) 04/X8 19,893.57 (17.2.17) 05/X8 37,500.00 (17.2.18) balance 0.00 17. Semi-Annual Required Earnings (17.2.19) Semi-Annual Required Earnings = Sinking Fund Deposit/Interest Table (17.2.6) Total Sinking Fund Rate (17.2.2) 2 Semi-Annual Required Earnings = 19,893.57 0.03 = 596.81 Note: add this payment to the Sinking Fund Deposit/Interest Table (17.2.6). 18. Sinking Fund Deposit/Interest Table (17.2.6) Deposit Interest Total Date 04/X8 19,893.57 19,893.57 596.81 20,490.38 06/X8 19. Receive Property Tax Revenues (17.2.14) XX/XX/XX Cash Taxes ReceivableCurrent Debit Amount Credit Amount Credit 57,393.57 Credit (17.2.5)

275

05/X8 Ledgers

07/X8 Ledgers

Cash Taxes ReceivableCurrent

Debit 57,393.57

Cash 03/X8 57,393.57 (17.2.14) 04/X8 19,893.57 05/X8 37,500.00 07/X8 57,393.57 (17.2.14) balance 57,393.57 Taxes ReceivableCurrent 02/X8 117,867.61 (17.2.13) 03/X8 57,393.57 07/X8 57,393.57 balance 3,080.47 20. Recognize Investment Earnings (17.2.16)

(17.2.17) (17.2.18)

(17.2.14) (17.2.14)

276

CHAPTER 17. STATE AND LOCAL GOVERNMENT DEBT SERVICE FUND EXAMPLES Debit Sinking Fund Investments (17.2.1) Amount RevenuesInvestment Earnings Debit Credit Sinking Fund Investments 596.81 RevenuesInvestment Earnings 596.81 Sinking Fund Investments 04/X8 19,893.57 (17.2.17) 08/X8 596.81 (17.2.16) balance 20,490.38 RevenuesInvestment Earnings 08/X8 596.81 (17.2.16) balance 596.81 Credit Amount

XX/XX/XX

08/X8 Ledgers

21. Semi-Annual Sinking Fund Deposit (17.2.17) Debit Credit Sinking Fund Investments (17.2.1) (17.2.4) Cash (17.2.4) Debit Credit 09/X8 Sinking Fund Investments 19,893.57 Cash 19,893.57 Note: add this payment to the Sinking Fund Deposit/Interest Table (17.2.6). Ledgers Sinking Fund Investments 04/X8 19,893.57 (17.2.17) 08/X8 596.81 (17.2.16) 09/X8 19,893.57 (17.2.17) balance 40,383.95 Cash 03/X8 57,393.57 (17.2.14) 04/X8 19,893.57 (17.2.17) 05/X8 37,500.00 (17.2.18) 07/X8 57,393.57 (17.2.14) 09/X8 19,893.57 (17.2.17) balance 37,500.00 XX/XX/XX 22. Sinking Fund Deposit/Interest Table (17.2.6) Date Deposit Interest Total 04/X8 19,893.57 19,893.57 06/X8 596.81 20,490.38 09/X8 19,893.57 40,383.95 23. Trial Balance Account Appropriations Estimated Revenue Actual Revenue RevenuesInvestment Earnings ExpendituresBond Interest Cash Taxes ReceivableCurrent Sinking Fund Investments Estimated UncollectibleCurrent Fund Balance Total Debit 596.81 114,787.14 596.81 37,500.00 37,500.00 3,080.47 40,383.95 3,080.47 74,403.19 193,464.42 193,464.42 Credit 75,000.00

Chapter 18

State and Local Government Proprietary Fund Examples


18.1 Comprehensive Example

Example 114, Supplies Internal Service Fund 20X8 The Town of Brighton is beginning a Supplies Internal Service Fund to centralize the purchase and distribution of supplies among the many governmental divisions. 01) 02) 03) 04) 05) 06) 07) 08) 09) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) Cash earmarked for supplies from other funds transfered in = $30,000. Supplies Inventory from other funds transfered in = $61,500. Received a 20-year, Water Utility Fund interfund loan = $130,000. Purchased land = $25,000. Purchased building on land = $70,000. Purchased warehouse equipment = $25,000. Purchased delivery equipment = $10,000. Purchased Supplies Inventory = $192,600. Markup Percent = 35%. Supplies issued to General Fund cost = $185,000. Received cash from General Fund for supplies issued = $249,750.. Administrative expenses = $11,000. Purchasing expenses = $19,000. Warehousing expenses = $12,000. Delivery expenses = $13,000. Vouchers paid = $164,000. Pay an installment of the Water Utility Fund interfund loan = $6,500. Reclassify the next current installment of the Water Utility Fund interfund loan = $6,500. Building depreciation expense = $3,500, and administration uses 10% of it. Building depreciation expense = $3,500, and purchasing uses 10% of it. Building depreciation expense = $3,500, and warehousing uses 80% of it. Warehousing equipment depreciation expense = $2,500. Delivery equipment depreciation expense = $2,000.

Solution 114: 1. Open an Internal Service Fund: Cash Transfer In (18.1.3) Debit Credit XX/XX/XX Cash Cash Amount Interfund Transfers In (15.3.15) Cash Amount Debit Credit 01/X8 Cash 30,000 Interfund Transfers In 30,000 2. Open an Internal Service Fund: Inventory Transfer In (18.1.4) 277

278

CHAPTER 18. STATE AND LOCAL GOVERNMENT PROPRIETARY FUND EXAMPLES Debit Inventoryitem Item Amount Interfund Transfers In (15.3.15) Debit Credit Inventory of Supplies 61,500 Interfund Transfers In 61,500 Credit Item Amount

XX/XX/XX

02/X8

3. Borrow Funds From Another Fund (18.1.5) XX/XX/XX Cash Interfund Loandepartment Non Current Debit Interfund Loan Amount Debit 130,000 Credit 130,000 Credit Interfund Loan Amount

3a/X8

Cash Interfund Loan Water Utility FundNon Current

4. Interfund Loan Annual Payback Amount (18.1.6) Interfund Loan Amount (18.1.5) Loan Annual Payback Amount = Loan Years 130,000 Loan Annual Payback Amount = = 6,500 20 5. Record the Current Portion Due of an Interfund Loan (18.1.7) XX/XX/XX Interfund Loandepartment Non Current Interfund Loandepartment Current Debit Payback Amount (18.1.6) Debit 6,500 Credit 6,500 Credit Payback Amount (18.1.6)

3b/X8

Interfund Loan Water Utility FundNon Current Interfund Loan Water Utility FundCurrent

6. Purchase Property, Plant, and Equipment (18.1.14) XX/XX/XX PP&E[item ][department ] (18.1.10) Cash and/or Debt Debit Credit PP&E Land 25,000 Cash 25,000 Debit Cost (3.1.6) or (3.2.1) or (3.3.1) Credit Cost (3.1.6) or (3.2.1) or (3.3.1)

04/X8

7. Purchase Property, Plant, and Equipment (18.1.14) XX/XX/XX PP&E[item ][department ] (18.1.10) Cash and/or Debt Debit Credit PP&E Building 70,000 Cash 70,000 Debit Cost (3.1.6) or (3.2.1) or (3.3.1) Credit Cost (3.1.6) or (3.2.1) or (3.3.1)

05/X8

8. Purchase Property, Plant, and Equipment (18.1.14) XX/XX/XX PP&E[item ][department ] (18.1.10) Cash and/or Debt Debit PP&E Warehouse Equipment 25,000 Cash Debit Cost (3.1.6) or (3.2.1) or (3.3.1) Credit 25,000 Credit Cost (3.1.6) or (3.2.1) or (3.3.1)

06/X8

9. Purchase Property, Plant, and Equipment (18.1.14) XX/XX/XX Debit PP&E[item ][department ] (18.1.10) Cost (3.1.6) or (3.2.1) or (3.3.1) Cash and/or Debt Debit Credit PP&E Delivery Equipment 10,000 Cash 10,000 Credit Cost (3.1.6) or (3.2.1) or (3.3.1)

07/X8

18.1. COMPREHENSIVE EXAMPLE 10. Purchase Inventory (18.1.15) XX/XX/XX Inventoryitem Vouchers Payable Debit Invoice Amount Debit 192,600 Credit 192,600 Credit Invoice Amount

279

08/X8

Inventory of Supplies Vouchers Payable

11. Markup Amount (18.1.18) Markup Amount = Inventoryitem Cost Markup Percent (18.1.17) Markup Amount = 185,000 0.35 = 64,750 12. Inventory Retail Amount (18.1.22) Inventory Retail Amount = Inventoryitem Cost + Markup Amount (18.1.18) Inventory Retail Amount = 185,000 + 64,750 = 249,750 13. Issue Inventory (18.1.23) XX/XX/XX Debit Cost of Items Issued (18.1.20) Inventory Cost Inventoryitem Due from Fund Retail Amount (18.1.22) Billings To Departments (18.1.19) Debit Credit Cost of Items Issued 185,000 Inventory of Supplies 185,000 Due from General Fund 249,750 Billings To Departments 248,750 Credit Inventory Cost Retail Amount (18.1.22)

09/X8

14. Receive Cash For Inventory (18.1.24) XX/XX/XX Cash Due from Fund Debit Retail Amount (18.1.22) Debit 249,750 Credit 249,750 Credit Retail Amount (18.1.22)

10/X8

Cash Due from General Fund

15. Pay Cash For Expenses (18.1.26) XX/XX/XX Debit Department Expenses (18.1.25) Expense Amount Cash Debit Credit Administrative Expenses 11,000 Cash 11,000 Credit Expense Amount

11/X8

16. Pay Cash For Expenses (18.1.26) XX/XX/XX Debit Department Expenses (18.1.25) Expense Amount Cash Debit Credit Purchasing Expenses 19,000 Cash 19,000 Credit Expense Amount

12/X8

17. Pay Cash For Expenses (18.1.26) XX/XX/XX Debit Department Expenses (18.1.25) Expense Amount Cash Debit Credit Warehousing Expenses 12,000 Cash 12,000 Credit Expense Amount

13/X8

280

CHAPTER 18. STATE AND LOCAL GOVERNMENT PROPRIETARY FUND EXAMPLES

18. Pay Cash For Expenses (18.1.26) XX/XX/XX Department Expenses (18.1.25) Cash Debit Credit Delivery Expenses 13,000 Cash 13,000 Debit Expense Amount Credit Expense Amount

14/X8

19. Pay Inventory Vendors (18.1.16) XX/XX/XX Debit Vouchers Payable Invoice Amount Cash Debit Credit Vouchers Payable 164,000 Cash 164,000 Credit Invoice Amount

15/X8

20. Pay the Current Portion Due of an Interfund Loan (18.1.8) XX/XX/XX Interfund Loandepartment Current Cash Debit Payback Amount (18.1.6) Debit 6,500 Credit 6,500 Credit Payback Amount (18.1.6)

16/X8

Interfund Loan Water Utility FundCurrent Cash

21. Record the Current Portion Due of an Interfund Loan (18.1.7) XX/XX/XX Interfund Loandepartment Non Current Interfund Loandepartment Current Debit Payback Amount (18.1.6) Debit 6,500 Credit 6,500 Credit Payback Amount (18.1.6)

17/X8

Interfund Loan Water Utility FundNon Current Interfund Loan Water Utility FundCurrent

22. Depreciation Amount (18.1.27): Administration Since many Departments share PP&Eitem then: Depreciation Amount = Total Period Depreciation for PP&Eitem PP&Edepartment Percent (18.1.11) Depreciation Amount = 3,500 0.10 = 350 23. Accumulate Building and Equipment Depreciation (18.1.28) XX/XX/XX Department Expenses (18.1.25) Allowance for DepreciationBuildingdepartment (18.1.12) Debit Credit Administration Expenses 350 Allowance for DepreciationBuilding 350 Debit (18.1.27) Credit (18.1.27)

18/X8

24. Depreciation Amount (18.1.27): Purchasing Since many Departments share PP&Eitem then: Depreciation Amount = Total Period Depreciation for PP&Eitem PP&Edepartment Percent (18.1.11) Depreciation Amount = 3,500 0.10 = 350 25. Accumulate Building and Equipment Depreciation (18.1.28) XX/XX/XX Department Expenses (18.1.25) Allowance for DepreciationBuildingdepartment (18.1.12) Debit Credit Purchasing Expenses 350 Allowance for DepreciationBuilding 350 Debit (18.1.27) Credit (18.1.27)

19/X8

18.1. COMPREHENSIVE EXAMPLE 26. Depreciation Amount (18.1.27): Warehousing Since many Departments share PP&Eitem then: Depreciation Amount = Total Period Depreciation for PP&Eitem PP&Edepartment Percent (18.1.11) Depreciation Amount = 3,500 0.80 = 2,800 27. Accumulate Building and Equipment Depreciation (18.1.28) XX/XX/XX Department Expenses (18.1.25) Allowance for DepreciationBuildingdepartment (18.1.12) Debit Credit Warehousing Expenses 2,800 Allowance for DepreciationBuilding 2,800 Debit (18.1.27) Credit (18.1.27)

281

20/X8

28. Depreciation Amount (18.1.27) Warehousing Equipment Since a single Department uses PP&Eitem then: Depreciation Amount = Total Period Depreciation for PP&Eitem Depreciation Amount = 2,500 29. Accumulate Building and Equipment Depreciation (18.1.28) XX/XX/XX Debit Department Expenses (18.1.25) (18.1.27) Allowance for DepreciationEquipmentdepartment (18.1.13) Debit Credit Warehousing Expenses 2,500 Allowance for DepreciationWarehouse Equipment 2,500 Credit (18.1.27)

21/X8

30. Depreciation Amount (18.1.27) Delivery Equipment Since a single Department uses PP&Eitem then: Depreciation Amount = Total Period Depreciation for PP&Eitem Depreciation Amount = 2,000 31. Accumulate Building and Equipment Depreciation (18.1.28) XX/XX/XX Debit Department Expenses (18.1.25) (18.1.27) Allowance for DepreciationEquipmentdepartment (18.1.13) Debit Credit Delivery Expenses 2,000 Allowance for DepreciationDelivery Equipment 2,000 Credit (18.1.27)

22/X8

282

CHAPTER 18. STATE AND LOCAL GOVERNMENT PROPRIETARY FUND EXAMPLES

Chapter 19

State and Local Government Fidiciary Fund Examples


19.1 Tax Agency Fund Example

Example 115, Tax Agency Fund: Each Governments Percent 20X8 The following table shows Campbell Countys residents property tax rates per $100 assessed value: Government State Campbell County Fund General fund General fund Capital projects fund Debt service fund Welfare fund Total county rate General fund Capital projects fund Debt service fund Total school rate General fund Street fund Pension fund Debt service fund Total city rate General fund Rate per $100 $0.010 1.034 0.086 0.191 0.105 1.416 4.305 0.172 0.363 4.840 1.820 0.238 0.180 0.058 2.296 1.498 $10.060

Washington School District

City of Washington

Library District Total tax rate per $100 (19.1.11)

What is each governments gross property tax percent due? What is each of Washington School Districts funds percentage? Solution 115: 1. Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Taxing Authority Tax Rate (19.1.10) Gross Property Tax Percent Due To Taxing Authorityi = Total Tax Rate (19.1.11) 0.01 Gross Property Tax Percent Due To State = 10.06 = 0.00099 = 0.099% 1.416 = 0.14076 = 14.076% Gross Property Tax Percent Due To Campbell County = 10.06 Gross Property Tax Percent Due To Washington School District = 4.840 10.06 = 0.48111 = 48.111% 2.296 Gross Property Tax Percent Due To City of Washington = 10.06 = 0.22823 = 22.823% Gross Property Tax Percent Due To Library District = 1.498 10.06 = 0.14891 = 14.891% 2. Fundj Percentage (19.1.21): Washington School District Taxing Authority Fundj Tax Rate (19.1.9) Fundj Percentage = Total Tax Rate (19.1.11) 283

284

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES General Fund Percentage = 4.305 10.06 = 0.42793 = 42.793% 0.172 = 0.01710 = 1.710% Capital Projects Fund Percentage = 10.06 Debt Service Fund Percentage = 0.363 10.06 = 0.03608 = 3.608%

19.2

Tax Agency Fund Example

Example 116, Tax Agency Fund 20X8 Campbell County collects property taxes for itself and for distribution to the State, City, and Districts. Gross Property Tax Percent Due To Taxing Authority (19.1.12): State Campbell County Washington School District City of Washington Library District Total 0.099 14.076 48.111 22.823 14.891 100.000

01) Property Tax Receivable Amount for year = $10,516,400. 02) Cash collection for period = $5,258,200. The agency fee collection percent = 1%. Cash has yet to be paid from the Tax Agency Fund. Perform the Tax Agency Fund journal entries for the period. Solution 116: 1. Property Taxes Receivable (19.1.3) 01/01/XX Taxes Receivable For Other Funds and GovernmentsCurrent Due To Other Funds and Governments Debit (15.3.6) Credit (15.3.6) Credit 10,516,400 Debit Amount Credit Amount Credit 5,258,200

01/X8

Taxes Receivable For Other Funds and GovernmentsCurrent Due To Other Funds and Governments

Debit 10,516,400

2. Property Tax Collection (19.1.13) XX/XX/XX Cash Taxes Receivable For Other Funds and GovernmentCurrent

02/X8

Cash Taxes Receivable For Other Funds and GovernmentCurrent

Debit 5,258,200

3. Governmental Agency Fee Withheld From Other Governmenti : State (19.1.14) Governmental Agency Fee Withheld From Other Governmenti = Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Agency Fee Collection Percent (19.1.5) Governmental Agency Fee Withheld From State = 5,258,200 0.00099 0.01 = 52.06 4. Due To Taxing Authorityi : State (19.1.16) Due To Taxing Authorityi Amount = [Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12)] Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Due To State = [5,258,200 0.00099] 52.06 = 5,153.56 Journal Entry Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.16) Due To Taxing Authorityi (19.1.15) (19.1.16) Debit Credit 02/X8 Due To Other Funds and Governments 5,153.56 Due To State 5,153.56

19.2. TAX AGENCY FUND EXAMPLE 5. Governmental Agency Fee Withheld From Other Governmenti : Campbell County (19.1.14) Governmental Agency Fee Withheld From Other Governmenti = Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Agency Fee Collection Percent (19.1.5) Governmental Agency Fee Withheld From Campbell County = 5,258,200 0.14076 0.00 = 0.00 Note: Campbell County is the Collecting Government (19.1.1).

285

6. Due To Taxing Authorityi : Campbell County (19.1.16) Due To Taxing Authorityi Amount = [Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12)] Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Due To Campbell County = [5,258,200 0.14076] 0.00 = 740,144.23 Journal Entry Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.16) Due To Taxing Authorityi (19.1.15) (19.1.16) Debit Credit 02/X8 Due To Other Funds and Governments 740,144.23 Due To Campbell County 740,144.23 7. Governmental Agency Fee Withheld From Other Governmenti : Washington School District (19.1.14) Governmental Agency Fee Withheld From Other Governmenti = Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Agency Fee Collection Percent (19.1.5) Governmental Agency Fee Withheld From Washington School District = 5,258,200 0.48111 0.01 = 25,297.73 8. Due To Taxing Authorityi : Washington School District (19.1.16) Due To Taxing Authorityi Amount = [Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12)] Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Due To Washington School District = [5,258,200 0.48111] 25,297.73 = 2,504,474.88 Journal Entry Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.16) Due To Taxing Authorityi (19.1.15) (19.1.16) Debit Credit 02/X8 Due To Other Funds and Governments 2,504,474.88 Due To Washington School District 2,504,474.88 9. Governmental Agency Fee Withheld From Other Governmenti : City of Washington (19.1.14) Governmental Agency Fee Withheld From Other Governmenti = Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Agency Fee Collection Percent (19.1.5) Governmental Agency Fee Withheld From City of Washington = 5,258,200 0.22823 0.01 = 12,000.79 10. Due To Taxing Authorityi : City of Washington (19.1.16) Due To Taxing Authorityi Amount = [Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12)] Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Due To City of Washington = [5,258,200 0.22823] 12,000.79 = 1,188,078.20 Journal Entry Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.16) Due To Taxing Authorityi (19.1.15) (19.1.16) Debit Credit 02/X8 Due To Other Funds and Governments 1,188,078.20 Due To City of Washington 1,188,078.20

286

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES

11. Governmental Agency Fee Withheld From Other Governmenti : Library District (19.1.14) Governmental Agency Fee Withheld From Other Governmenti = Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12) Agency Fee Collection Percent (19.1.5) Governmental Agency Fee Withheld From Library District = 5,258,200 0.14891 0.01 = 7,829.99 12. Due To Taxing Authorityi : Library District (19.1.16) Due To Taxing Authorityi Amount = [Property Tax Collection (19.1.13) Gross Property Tax Percent Due To Taxing Authorityi (19.1.12)] Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Due To Library District = [5,258,200 0.14891] 7,829.99 = 775,168.58 Journal Entry Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.16) Due To Taxing Authorityi (19.1.15) (19.1.16) Debit Credit 02/X8 Due To Other Funds and Governments 775,168.58 Due To Library District 775,168.58 13. Total Agency Fee Withheld (19.1.18) Let n = the number of Other Governments (19.1.4). n Total Agency Fee Withheld = i=1 Governmental Agency Fee Withheld From Other Governmenti (19.1.14) Total Agency Fee Withheld = 52.06 + 25,297.73 + 12,000.79 + 7,829.99 = 45,180.57 14. Agency Fee Due To Collecting Government (19.1.1) (19.1.19) Debit Credit XX/XX/XX Due To Other Funds and Governments (19.1.18) Due To Collecting Government (19.1.1) (19.1.18) Debit Credit 02/X8 Due To Other Funds and Governments 45,180.57 Due To Campbell County 45,180.57

19.3

Tax Agency Fund Example

Example 117, Participating in a Tax Agency Fund 20X8 The Washington School District participates in the Campbell County Tax Agency Fund. The agency fee collection percent = 1%. The total agency fee withheld by the Tax Agency Fund = $45,180.57. The Districts Fund Percentage (19.1.21) table is as follows: General fund Capital projects Debt service Total 42.793 1.710 3.608 48.111

01/01/X8) The imposed property taxes (15.3.6) for 20X8 = $10,516,400. 06/30/X8) Tax Agency Fund cash collected = $5,258,200. The District received all of the cash due. Record the journal entries for each of the Washington School Districts funds. Record the journal entry for Campbell Countys General Fund Revenue. Solution 117: 1. Fundj Receivable Amount (19.1.22): General Fund Fundj Receivable Amount = Property Tax Receivable Amount (15.3.6) Fundj Percentage (19.1.21) Fundj Receivable Amount = 10,516,400 0.42793 = 4,500,283.05 Journal Entry

19.3. TAX AGENCY FUND EXAMPLE Debit (19.1.22) Credit

287

01/01/XX

Taxes ReceivableCurrent Actual Revenues Taxes ReceivableCurrent Actual Revenues

01/01/X8

(19.1.22) Debit Credit 4,500,283.05 4,500,283.05

2. Fundj Receivable Amount (19.1.22): Capital Projects Fund Fundj Receivable Amount = Property Tax Receivable Amount (15.3.6) Fundj Percentage (19.1.21) Fundj Receivable Amount = 10,516,400 0.01710 = 179,830.44 Journal Entry Debit Credit 01/01/XX Taxes ReceivableCurrent (19.1.22) Actual Revenues (19.1.22) Debit Credit 01/01/X8 Taxes ReceivableCurrent 179,830.44 Actual Revenues 179,830.44 3. Fundj Receivable Amount (19.1.22): Debt Service Fund Fundj Receivable Amount = Property Tax Receivable Amount (15.3.6) Fundj Percentage (19.1.21) Fundj Receivable Amount = 10,516,400 0.03608 = 379,431.71 Journal Entry Debit Credit 01/01/XX Taxes ReceivableCurrent (19.1.22) Actual Revenues (19.1.22) Debit Credit 01/01/X8 Taxes ReceivableCurrent 379,431.71 Actual Revenues 379,431.71 4. Participating Fundj Fee Expenditure (19.1.24): General Fund Since fund belongs to Other Government (19.1.4) then: Participating Fundj Fee Expenditure = Property Tax Collection (19.1.13) Fundj Percentage (19.1.21) Agency Fee Collection Percent (19.1.5) General Fund Fee Expenditure = 5,258,200 0.42793 0.01 = 22,501.42 Journal Entry, if Other Government (19.1.4): Debit Credit XX/XX/XX Expenditures (19.1.24) Taxes ReceivableCurrent (19.1.24) Debit Credit 06/30/X8 Expenditures 22,501.42 Taxes ReceivableCurrent 22,501.42 5. Participanting Fundj Cash Collected (19.1.25): General Fund Participanting Fundj Cash Collected = [Property Tax Collection (19.1.13) Fundj Percentage (19.1.21)] Participating Fundj Fee Expenditure (19.1.24) General Fund Cash Collected = [5,258,200 0.42793] 22,501.42 = 2,227,640.11 Journal Entry Debit Credit XX/XX/XX Cash (19.1.25) Taxes ReceivableCurrent (19.1.25) Debit Credit 06/30/X8 Cash 2,227,640.11 Taxes ReceivableCurrent 2,227,640.11 6. Participating Fundj Fee Expenditure (19.1.24): Capital Projects Fund Since fund belongs to Other Government (19.1.4) then:

288

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES Participating Fundj Fee Expenditure = Property Tax Collection (19.1.13) Fundj Percentage (19.1.21) Agency Fee Collection Percent (19.1.5) Capital Projects Fund Fee Expenditure = 5,258,200 0.01710 0.01 = 899.15 Journal Entry, if Other Government (19.1.4): Debit Credit XX/XX/XX Expenditures (19.1.24) Taxes ReceivableCurrent (19.1.24) Debit Credit 06/30/X8 Expenditures 899.15 Taxes ReceivableCurrent 899.15

7. Participanting Fundj Cash Collected (19.1.25): Capital Projects Fund Participanting Fundj Cash Collected = [Property Tax Collection (19.1.13) Fundj Percentage (19.1.21)] Participating Fundj Fee Expenditure (19.1.24) Capital Projects Cash Collected = [5,258,200 0.01710] 899.15 = 89,016.07 Journal Entry Debit Credit XX/XX/XX Cash (19.1.25) Taxes ReceivableCurrent (19.1.25) Debit Credit 06/30/X8 Cash 89,016.07 Taxes ReceivableCurrent 89,016.07 8. Participating Fundj Fee Expenditure (19.1.24): Debt Service Fund Since fund belongs to Other Government (19.1.4) then: Participating Fundj Fee Expenditure = Property Tax Collection (19.1.13) Fundj Percentage (19.1.21) Agency Fee Collection Percent (19.1.5) Debt Service Fund Fee Expenditure = 5,258,200 0.03608 0.01 = 1,897.16 Journal Entry, if Other Government (19.1.4): Debit Credit XX/XX/XX Expenditures (19.1.24) Taxes ReceivableCurrent (19.1.24) Debit Credit 06/30/X8 Expenditures 1,897.16 Taxes ReceivableCurrent 1,897.16 9. Participanting Fundj Cash Collected (19.1.25): Debt Service Fund Participanting Fundj Cash Collected = [Property Tax Collection (19.1.13) Fundj Percentage (19.1.21)] Participating Fundj Fee Expenditure (19.1.24) Debt Service Cash Collected = [5,258,200 0.03608] 1,897.16 = 187,818.70 Journal Entry Debit Credit XX/XX/XX Cash (19.1.25) Taxes ReceivableCurrent (19.1.25) Debit Credit 06/30/X8 Cash 187,818.70 Taxes ReceivableCurrent 187,818.70 10. Collecting Governments General Fund Fee Collection (19.1.26): Campbell County Debit Credit XX/XX/XX Cash Total Agency Fee Withheld (19.1.18) Revenues (19.1.18) Debit Credit 06/30/X8 Cash 45,180.57 Revenues 45,180.57

19.4. INVESTMENT TRUST FUND EXAMPLE

289

19.4

Investment Trust Fund Example

Example 118, Investment Trust Fund: Drew County 20X8 On January 10, 20X8, Drew County created an Investment Trust Fund for: 1. Drew Countys Debt Service Fund. 2. Drew Countys Capital Projects Fund. 3. Town of Calvins Debit Service Fund. 4. Calvin School Districts Capital Projects Fund. The Investment Trust Fund is called The Drew County Investment Pool. 01) Drew Countys Debt Service Fund transfered out cash to the Investment Trust Fund = $1,000,000. 02) Drew Countys Debt Service Fund is transfering out its US Agency Obligations with a book value of $13,373,000 to the Investment Trust Fund. However, since the last mark-to-market, the obligations have increased in value = $52,000. 03) Drew Countys Debt Service Fund is transfering out its US Agency Obligations with a book value of $13,425,000 to the Investment Trust Fund. However, since the last interest check was received, the obligations have accrued interest = $425,000. 04) Drew Countys Debt Service Fund transfered out to the Investment Trust Fund its US Agency Obligations with a book value = $13,850,000. 05) Town of Calvins Debt Service Fund is transfering out its US Treasury Notes with a book value of $9,568,000 to the Investment Trust Fund. However, since the last mark-to-market, the notes have decreased in value = $23,000. 06) Town of Calvins Debt Service Fund is transfering out its US Treasury Notes with a book value of $9,545,000 to the Investment Trust Fund. However, since the last interest check was received, the notes have accrued interest = $192,000. 07) Town of Calvins Debt Service Fund transfered out to the Investment Trust Fund its US Treasury Notes with a book value = $9,737,000. 08) Town of Calvins Debt Service Fund is transfering out its US Agency Obligations with a book value of $158,700 to the Investment Trust Fund. However, since the last mark-to-market, the obligations have increased in value = $1,300. 09) Town of Calvins Debt Service Fund is transfering out its US Agency Obligations with a book value of $160,000 to the Investment Trust Fund. However, since the last interest check was received, the obligations have accrued interest = $3,000. 10) Town of Calvins Debt Service Fund transfered out to the Investment Trust Fund its US Agency Obligations with a book value = $163,000. 11) Calvin School Districts Capital Projects Fund is transfering out its US Agency Obligations with a book value of $2,789,000 to the Investment Trust Fund. However, since the last mark-to-market, the obligations have increased in value = $11,000. 12) Calvin School Districts Capital Projects Fund is transfering out its US Agency Obligations now with a book value of $2,800,000 to the Investment Trust Fund. However, since the last interest check was received, the obligations have accrued interest = $76,900. 13) Town of Calvins Capital Projects Fund transfered out to the Investment Trust Fund its US Agency Obligations with a book value = $2,876,900. 14) Calvin School Districts Capital Projects Fund is transfering out its Repurchase Agreements with a book value of $2,060,000 to the Investment Trust Fund. However, since the last interest check was received, the Agreements have accrued interest = $13,100. 15) Town of Calvins Capital Projects Fund transfered out to the Investment Trust Fund its Repurchase Agreements with a book value = $2,073,100. 16) The Investment Trust Fund received cash from Drew Countys Debt Service Fund = $1,000,000. 17) The Investment Trust Fund received US Agency Obligations from Drew Countys Debt Service Fund with a book value = $13,850,000. However, included in the book value is Accrued Interest = $425,000. 18) The Investment Trust Fund received US Treasury Notes from The Town of Calvins Debt Service Fund with a book value = $9,737,000. However, included in the book value is Accrued Interest = $192,000. 19) The Investment Trust Fund received US Agency Obligations from The Town of Calvins Debt Service Fund with a book value = $163,000. However, included in the book value is Accrued Interest = $3,000. 20) The Investment Trust Fund received US Agency Obligations from Calvin School Districts Capital Projects Fund with a book value = $2,876,900. However, included in the book value is Accrued Interest = $76,000. 21) The Investment Trust Fund received Repurchase Agreements from Calvin School Districts Capital Projects Fund with a book value = $2,073,100. However, included in the book value is Accrued Interest = $13,100. 22) The US Treasury Notes now have a market value = $9,535,000.

290

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES

23) The US Agency Obligations now have a market value = $16,695,000. 24) Drew Countys Capital Projects Fund transfered out cash proceeds from a recent bond issue to the Investment Trust Fund = $15,000,000. 25) The Investment Trust Fund accrued interest receivable = $900,000. 26) The Investment Trust Fund received interest = $1,610,000. 27) The US Agency Obligations now have a market value = $17,145,000. 28) The Investment Trust Fund accrued interest receivable = $720,000. 29) Drew Countys Capital Projects Fund withdrew cash from the Investment Trust Fund = $5,000,000. 30) Prepare the Statement of Changes in Net Assets. Prepare all the journal entries for these transactions. Solution 118: 1. Partipating Funds Cash Transfer Out (19.2.7): Drew Countys Debt Service Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Cash Amount Cash Cash Amount Debit Credit 01/X8 Equity In Pooled Investments 1,000,000 Cash 1,000,000 2. Participating Funds Mark-To-Market (19.2.8): Drew Countys Debt Service Fund Since increase in value: Debit Credit XX/XX/XX InvestmentInvestment Title Increase Amount RevenuesChange in Fair Value of Investments Increase Amount Debit Credit 02/X8 InvestmentUS Agency Obligations 52,000 RevenuesChange in Fair Value of Investments 52,000 3. Participating Funds Accrued Interest (19.2.9): Drew Countys Debt Service Fund Debit Credit XX/XX/XX InvestmentInvestment Title Accrued Interest Amount RevenuesInvestment Earnings Accrued Interest Amount Debit Credit 03/X8 InvestmentUS Agency Obligations 425,000 RevenuesInvestment Earnings 425,000 4. Participating Funds Security Transfer Out (19.2.11): Drew Countys Debt Service Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Book Value InvestmentInvestment Title Book Value Debit Credit 04/X8 Equity In Pooled Investments 13,850,000 InvestmentUS Agency Obligations 13,850,000 5. Participating Funds Mark-To-Market (19.2.8): Town of Calvins Debt Service Fund Since decrease in value: Debit Credit XX/XX/XX ExpensesChange in Fair Value of Investments Decrease Amount InvestmentInvestment Title Decrease Amount Debit Credit 05/X8 ExpensesChange in Fair Value of Investments 23,000 InvestmentUS Treasury Notes 23,000 6. Participating Funds Accrued Interest (19.2.9):Town of Calvins Debt Service Fund Debit Credit XX/XX/XX InvestmentInvestment Title Accrued Interest Amount RevenuesInvestment Earnings Accrued Interest Amount

19.4. INVESTMENT TRUST FUND EXAMPLE Debit 192,000 Credit 192,000

291

06/X8

InvestmentUS Treasury Notes RevenuesInvestment Earnings

7. Participating Funds Security Transfer Out (19.2.11): Town of Calvins Debt Service Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Book Value InvestmentInvestment Title Book Value Debit Credit 07/X8 Equity In Pooled Investments 9,737,000 InvestmentUS Treasury Notes 9,737,000 8. Participating Funds Mark-To-Market (19.2.8): Town of Calvins Debt Service Fund Since increase in value: Debit Credit XX/XX/XX InvestmentInvestment Title Increase Amount RevenuesChange in Fair Value of Investments Increase Amount Debit Credit 08/X8 InvestmentUS Agency Obligations 1,300 RevenuesChange in Fair Value of Investments 1,300 9. Participating Funds Accrued Interest (19.2.9): Town of Calvins Debt Service Fund Debit Credit XX/XX/XX InvestmentInvestment Title Accrued Interest Amount RevenuesInvestment Earnings Accrued Interest Amount Debit Credit 09/X8 InvestmentUS Agency Obligations 3,000 RevenuesInvestment Earnings 3,000 10. Participating Funds Security Transfer Out (19.2.11): Town of Calvins Debt Service Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Book Value InvestmentInvestment Title Book Value Debit Credit 10/X8 Equity In Pooled Investments 163,000 InvestmentUS Agency Obligations 163,000 11. Participating Funds Mark-To-Market (19.2.8): Calvin School Districtss Capital Projects Fund Since increase in value: Debit Credit XX/XX/XX InvestmentInvestment Title Increase Amount RevenuesChange in Fair Value of Investments Increase Amount Debit Credit 11/X8 InvestmentUS Agency Obligations 11,000 RevenuesChange in Fair Value of Investments 11,000 12. Participating Funds Accrued Interest (19.2.9): Calvin School Districts Capital Projects Fund Debit Credit XX/XX/XX InvestmentInvestment Title Accrued Interest Amount RevenuesInvestment Earnings Accrued Interest Amount Debit Credit 12/X8 InvestmentUS Agency Obligations 76,900 RevenuesInvestment Earnings 76,900 13. Participating Funds Security Transfer Out (19.2.11): Calvin School Districts Capital Projects Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Book Value InvestmentInvestment Title Book Value Debit Credit 13/X8 Equity In Pooled Investments 2,876,900 InvestmentUS Agency Obligations 2,876,900

292

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES

14. Participating Funds Accrued Interest (19.2.9): Calvin School Districts Capital Projects Fund Debit Credit XX/XX/XX InvestmentInvestment Title Accrued Interest Amount RevenuesInvestment Earnings Accrued Interest Amount Debit Credit 14/X8 InvestmentRepurchase Agreements 13,100 RevenuesInvestment Earnings 13,100 15. Participating Funds Security Transfer Out (19.2.11): Calvin School Districts Capital Projects Fund Debit Credit XX/XX/XX Equity In Pooled Investments (19.2.6) Book Value InvestmentInvestment Title Book Value Debit Credit 15/X8 Equity In Pooled Investments 2,073,100 InvestmentRepurchase Agreements 2,073,100 16. Investment Trust Funds Cash Transfer In from Sponsoring Government (19.2.13) Debit Credit XX/XX/XX Cash Cash Amount Due To Sponsoring Governments Source Fund Cash Amount Debit Credit 16/X8 Cash 1,000,000 Due To Debt Service Fund 1,000,000 Ledgers Cash 16/X8 1,000,000 (19.2.13) balance 1,000,000 Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) balance 1,000,000 17. Investment Trust Funds Security Book Value (19.2.21): Drew Countys US Agency Obligation Investment Trust Funds Security Book Value = Participating Funds Security Book Value (19.2.20) Accrued Interest or Dividends Investment Trust Funds Security Book Value = 13,850,000 425,000 = 13,425,000 18. Investment Trust Funds Security Transfer In from Sponsoring Government (19.2.23) Debit Credit XX/XX/XX InvestmentInvestment Title (19.2.21) Accrued Interest Receivable Accrued Amount Due To Sponsoring Governments Source Fund (19.2.20) Debit Credit 17/X8 InvestmentUS Agency Obligations 13,425,000 Accrued Interest Receivable 425,000 Due To Debt Service Fund 13,850,000 Ledgers InvestmentUS Agency Obligations 17/X8 13,425,000 (19.2.23) balance 13,425,000 Accrued Interest Receivable 17/X8 425,000 (19.2.23) balance 425,000 Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) balance 14,850,000 19. Investment Trust Funds Security Book Value (19.2.21): Town of Calvins US Treasury Notes

19.4. INVESTMENT TRUST FUND EXAMPLE Investment Trust Funds Security Book Value = Participating Funds Security Book Value (19.2.20) Accrued Interest or Dividends Investment Trust Funds Security Book Value = 9,737,000 192,000 = 9,545,000

293

20. Investment Trust Funds Security Transfer In from Participating Government (19.2.2) (19.2.24) Debit Credit XX/XX/XX InvestmentsInvestment Title (19.2.21) Accrued Interest Receivable Accrued Amount AdditionsDeposits in Pooled InvestmentsParticipating Government (19.2.20) Debit Credit 18/X8 InvestmentsUS Treasury Notes 9,545,000 Accrued Interest Receivable 192,000 AdditionsDeposits in Pooled InvestmentsTown of Calvin 9,737,000 Ledgers InvestmentUS Treasury Notes 18/X8 9,545,000 (19.2.24) balance 9,545,000 Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) balance 617,000 AdditionsDeposits in Pooled InvestmentsTown of Calvin 18/X8 9,737,000 (19.2.24) balance 9,737,000 21. Investment Trust Funds Security Book Value (19.2.21): Town of Calvins US Agency Obligations Investment Trust Funds Security Book Value = Participating Funds Security Book Value (19.2.20) Accrued Interest or Dividends Investment Trust Funds Security Book Value = 163,000 3,000 = 160,000 22. Investment Trust Funds Security Transfer In from Participating Government (19.2.2) (19.2.24) Debit Credit XX/XX/XX InvestmentsInvestment Title (19.2.21) Accrued Interest Receivable Accrued Amount AdditionsDeposits in Pooled InvestmentsParticipating Government (19.2.20) Debit Credit 19/X8 InvestmentsUS Agency Obligations 160,000 Accrued Interest Receivable 3,000 AdditionsDeposits in Pooled InvestmentsTown of Calvin 163,000 Ledgers InvestmentUS Agency Obligations 17/X8 13,425,000 (19.2.23) 19/X8 160,000 (19.2.24) balance 13,585,000 Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) balance 620,000 AdditionsDeposits in Pooled InvestmentsTown of Calvin 18/X8 9,737,000 (19.2.24) 19/X8 163,000 (19.2.24) balance 9,900,000 23. Investment Trust Funds Security Book Value (19.2.21): Calvin School Districts US Agency Obligations Investment Trust Funds Security Book Value = Participating Funds Security Book Value (19.2.20) Accrued Interest or Dividends

294

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES Investment Trust Funds Security Book Value = 2,876,900 76,900 = 2,800,000

24. Investment Trust Funds Security Transfer In from Participating Government (19.2.2) (19.2.24) Debit Credit XX/XX/XX InvestmentsInvestment Title (19.2.21) Accrued Interest Receivable Accrued Amount AdditionsDeposits in Pooled InvestmentsParticipating Government (19.2.20) Debit Credit 20/X8 InvestmentsUS Agency Obligations 2,800,000 Accrued Interest Receivable 76,900 AdditionsDeposits in Pooled InvestmentsCalvin School District 2,876,900 Ledgers InvestmentUS Agency Obligations 17/X8 13,425,000 (19.2.23) 19/X8 160,000 (19.2.24) 20/X8 2,800,000 (19.2.24) balance 16,385,000 Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) 20/X8 76,900 (19.2.24) balance 696,900 AdditionsDeposits in Pooled InvestmentsCalvin School District 20/X8 2,876,900 (19.2.24) balance 2,876,900 25. Investment Trust Funds Security Book Value (19.2.21): Calvin School Districts Repurchase Agreements Investment Trust Funds Security Book Value = Participating Funds Security Book Value (19.2.20) Accrued Interest or Dividends Investment Trust Funds Security Book Value = 2,073,100 13,100 = 2,060,000 26. Investment Trust Funds Security Transfer In from Participating Government (19.2.2) (19.2.24) Debit Credit XX/XX/XX InvestmentsInvestment Title (19.2.21) Accrued Interest Receivable Accrued Amount AdditionsDeposits in Pooled InvestmentsParticipating Government (19.2.20) Debit Credit 21/X8 InvestmentsRepurchase Agreements 2,060,000 Accrued Interest Receivable 13,100 AdditionsDeposits in Pooled InvestmentsCalvin School District 2,073,100 Ledgers InvestmentRepurchase Agreements 21/X8 2,060,000 (19.2.24) balance 2,060,000 Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) 20/X8 76,900 (19.2.24) 21/X8 13,100 (19.2.24) balance 710,000 AdditionsDeposits in Pooled InvestmentsCalvin School District 20/X8 2,876,900 (19.2.24) 21/X8 2,073,100 (19.2.24) balance 4,950,000

19.4. INVESTMENT TRUST FUND EXAMPLE

295

27. Total Fund Equity (19.2.27) Let m = the number of Sponsoring Governments Funds (19.2.4). Let n = the number of Participating Governments Funds (19.2.5). m Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance n + k=1 Held in Trust For Participantk (19.2.15) Credit Balance n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance n k=1 DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance n + k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance n + k=1 AdditionsInvestment Earningsk (19.2.26) Credit Balance m Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance = 14,850,000 n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance = 14,850,000 = 29,700,000 28. Fund Proportional Equity (19.2.29): Drew Countys Debt Service Fund Sponsoring Government Fundi Proportional Equity = Due To Sponsoring Government Source Fund (19.2.12) Credit Balance Total Fund Equity (19.2.27) Drew Countys Debt Service Fund Proportional Equity = 14,850,000 29,700,000 = 0.50 29. Participating Government Fundk Proportional Equity Numerator (19.2.28): Town of Calvin Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Town of Calvins Debt Service Fund Equity Numerator = 0 + 9,900,000 0 + 0 + 0 = 9,900,000 30. Fund Proportional Equity (19.2.29): Town of Calvin Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Town of Calvins Debt Service Fund Proportional Equity = 9,900,000 29,700,000 = 0.33333 31. Participating Government Fundk Proportional Equity Numerator (19.2.28): Calvin School District Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Calvin School Districts Capital Projects Fund Equity Numerator = 0 + 4,950,000 0 + 0 + 0 = 4,950,000 32. Fund Proportional Equity (19.2.29): Calvin School District Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Calvin School Districts Capital Projects Fund Proportional Equity = 4,950,000 29,700,000 = 0.16667 33. Investment Gain or (Loss) (19.2.30): US Treasury Notes Investment Gain or (Loss) = Security Fair Value InvestmentSecurity Debit Balance Investment Gain or (Loss) = 9,535,000 9,545,000 = (10,000) 34. Proportional Gain or (Loss) (19.2.31): US Treasury Notes

296

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES for k in each Participating Fund (19.2.3): Proportional Gain or (Loss)k = Investment Gain or (Loss) (19.2.30) Sponsoring Government Fundk Proportional Equity (19.2.29) or Participating Government Fundk Proportional Equity (19.2.29) Proportional (Loss) Drew Countys Debt Service Fund = (10,000) 0.50 = (5,000) Proportional (Loss) Town of Calvins Debt Service Fund = (10,000) 0.33333 = (3,333) Proportional (Loss) Calvin School Districts Capital Projects Fund = (10,000) 0.16667 = (1,667)

35. Distribute The Gains or Losses (19.2.32): US Treasury Notes Since (Loss) then: XX/XX/XX Debit Due To Sponsoring Government Source Fund (19.2.31) AdditionsChange in Fair Value of InvestmentsParticipating Government (19.2.31) InvestmentsInvestment Title Debit Credit Due To Drew Countys Debt Service Fund 5,000 AdditionsChange in Fair Value of InvestmentsTown of Calvin 3,333 AdditionsChange in Fair Value of InvestmentsCalvin School District 1,667 InvestmentsUS Treasury Notes 10,000 Credit

(19.2.30)

22/X8

Ledgers Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) 22/X8 5,000 (19.2.32) balance 14,845,000 AdditionsChange in Fair Value of InvestmentsTown of Calvin 22/X8 3,333 (19.2.32) balance 3,333 AdditionsChange in Fair Value of InvestmentsCalvin School District 22/X8 1,667 (19.2.32) balance 1,667 InvestmentUS Treasury Notes 18/X8 9,545,000 (19.2.24) 22/X8 10,000 (19.2.32) balance 9,535,000 36. Investment Gain or (Loss) (19.2.30): US Agency Obligations Investment Gain or (Loss) = Security Fair Value InvestmentSecurity Debit Balance Investment Gain or (Loss) = 16,695,000 16,385,000 = 310,000 37. Proportional Gain or (Loss) (19.2.31): US Agency Obligations for k in each Participating Fund (19.2.3): Proportional Gain or (Loss)k = Investment Gain or (Loss) (19.2.30) Sponsoring Government Fundk Proportional Equity (19.2.29) or Participating Government Fundk Proportional Equity (19.2.29) Proportional Gain Drew Countys Debt Service Fund = 310,000 0.50 = 155,000 Proportional Gain Town of Calvins Debt Service Fund = 310,000 0.33333 = 103,332 Proportional Gain Calvin School Districts Capital Projects Fund = 310,000 0.16667 = 51,668 38. Distribute The Gains or Losses (19.2.32): US Agency Obligations Since Gain then: XX/XX/XX InvestmentsInvestment Title Due To Sponsoring Government Source Fund AdditionsChange in Fair Value of InvestmentsParticipating Government Debit (19.2.30) Credit (19.2.31) (19.2.31)

19.4. INVESTMENT TRUST FUND EXAMPLE Debit 310,000 Credit 155,000 103,332 51,668

297

23/X8

InvestmentsUS Agency Obligations Due To Drew Countys Debt Service Fund AdditionsChange in Fair Value of InvestmentsTown of Calvin AdditionsChange in Fair Value of InvestmentsCalvin School District

Ledgers Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) 22/X8 5,000 (19.2.32) 23/X8 155,000 (19.2.32) balance 15,000,000 AdditionsChange in Fair Value of InvestmentsTown of Calvin 22/X8 3,333 (19.2.32) 23/X8 103,333 (19.2.32) ( rounded) balance 100,000 AdditionsChange in Fair Value of InvestmentsCalvin School District 22/X8 1,667 (19.2.32) 23/X8 51,667 (19.2.32) ( rounded) balance 50,000 InvestmentUS Agency Obligations 17/X8 13,425,000 (19.2.23) 19/X8 160,000 (19.2.24) 20/X8 2,800,000 (19.2.24) 23/X8 310,000 (19.2.32) balance 16,695,000

39. Partipating Funds (19.2.3) Cash Transfer Out (19.2.7): Drew Countys Capital Projects Fund Debit Credit XX/XX/XX Equity in Pooled Investments (19.2.6) Cash Amount Cash Cash Amount Debit Credit 24/X8 Equity in Pooled Investments 15,000,000 Cash 15,000,000 40. Investment Trust Funds Cash Transfer In from Sponsoring Government (19.2.13) Debit Credit XX/XX/XX Cash Cash Amount Due To Sponsoring Governments Source Fund Cash Amount Debit Credit 24/X8 Cash 15,000,000 Due To Capital Projects Fund 15,000,000 Ledgers Cash 16/X8 1,000,000 (19.2.13) 24/X8 15,000,000 (19.2.13) balance 16,000,000 Due To Capital Projects Fund 24/X8 15,000,000 (19.2.13) balance 15,000,000

41. Total Fund Equity (19.2.27) Let m = the number of Sponsoring Governments Funds (19.2.4). Let n = the number of Participating Governments Funds (19.2.5).

298

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance n + k=1 Held in Trust For Participantk (19.2.15) Credit Balance n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance n k=1 DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance n + k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance n + k=1 AdditionsInvestment Earningsk (19.2.26) Credit Balance m Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance = 30,000,000 n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance = 14,850,000 n + k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance = 150,000 = 45,000,000
m

42. Fund Proportional Equity (19.2.29): Drew Countys Debt Service Fund Sponsoring Government Fundi Proportional Equity = Due To Sponsoring Government Source Fund (19.2.12) Credit Balance Total Fund Equity (19.2.27) Drew Countys Debt Service Fund Proportional Equity = 15,000,000 45,000,000 = 0.33333 43. Fund Proportional Equity (19.2.29): Drew Countys Capital Projects Fund Sponsoring Government Fundi Proportional Equity = Due To Sponsoring Government Source Fund (19.2.12) Credit Balance Total Fund Equity (19.2.27) Drew Countys Capital Projects Fund Proportional Equity = 15,000,000 45,000,000 = 0.33333 44. Participating Government Fundk Proportional Equity Numerator (19.2.28): Town of Calvin Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Town of Calvins Proportional Equity Numerator = 0 + 9,900,000 0 + 100,000 + 0 = 10,000,000 45. Fund Proportional Equity (19.2.29): Town of Calvin Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Town of Calvins Debt Service Fund Proportional Equity = 10,000,000 45,000,000 = 0.22222 46. Participating Government Fundk Proportional Equity Numerator (19.2.28): Calvin School District Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Calvin School Districts Proportional Equity Numerator = 0 + 4,950,000 0 + 50,000 + 0 = 5,000,000 47. Fund Proportional Equity (19.2.29): Calvin School District Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Calvin School Districts Capital Projects Fund Proportional Equity = 5,000,000 45,000,000 = 0.11111

19.4. INVESTMENT TRUST FUND EXAMPLE

299

48. Proportional Interest or Dividend (19.2.33) for k in each Participating Fund (19.2.3): Proportional Interest or Dividendk = Interest Accrued or Dividend Declared Sponsoring Government Fundk Proportional Equity (19.2.29) or Participating Government Fundk Proportional Equity (19.2.29) Proportional Interest Drew Countys Debt Service Fund = 900,000 0.33333 = 300,000 Proportional Interest Drew Countys Capital Projects Fund = 900,000 0.33333 = 300,000 Proportional Interest Town of Calvins Debt Service Fund = 900,000 0.22222 = 200,000 Proportional Interest Calvin School Districts Capital Projects Fund = 900,000 0.11111 = 100,000

49. Distribute The Interest or Dividend (19.2.34) XX/XX/XX Accrued Interest (or Dividend) Receivable Due To Sponsoring Government Source Fund AdditionsInvestment EarningsParticipating Government Debit Accrued Interest Receivable 900,000 Due To Debt Service Fund Due To Capital Projects Fund AdditionsInvestment EarningsTown of Calvin AdditionsInvestment EarningsCalvin School District Debit Amount Credit (19.2.33) (19.2.33) Credit 300,000 300,000 200,000 100,000

25/X8

Ledgers Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) 20/X8 76,900 (19.2.24) 21/X8 13,100 (19.2.24) 25/X8 900,000 (19.2.34) balance 1,610,000 Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) 22/X8 5,000 (19.2.32) 23/X8 155,000 (19.2.32) 25/X8 300,000 (19.2.34) balance 15,300,000 Due To Capital Projects Fund 24/X8 15,000,000 (19.2.13) 25/X8 300,000 (19.2.34) balance 15,300,000 AdditionsInvestment EarningsTown of Calvin 25/X8 200,000 (19.2.34) balance 200,000 AdditionsInvestment EarningsCalvin School District 25/X8 100,000 (19.2.34) balance 100,000

50. Received Cash for Accrued Interest 26/X8 Ledgers Cash Accrued Interest Receivable Debit 1,610,000 Credit 1,610,000

300

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) 20/X8 76,900 (19.2.24) 21/X8 13,100 (19.2.24) 25/X8 900,000 (19.2.34) 26/X8 1,610,000 balance 0 Cash 16/X8 1,000,000 (19.2.13) 24/X8 15,000,000 (19.2.13) 26/X8 1,610,000 (Cash received) balance 17,610,000

51. Investment Gain or (Loss) (19.2.30): US Agency Obligations Investment Gain or (Loss) = Security Fair Value InvestmentSecurity Debit Balance Investment Gain or (Loss) = 17,145,000 16,695,000 = 450,000 52. Proportional Gain or (Loss) (19.2.31): US Agency Obligations for k in each Participating Fund (19.2.3): Proportional Gain or (Loss)k = Investment Gain or (Loss) (19.2.30) Sponsoring Government Fundk Proportional Equity (19.2.29) or Participating Government Fundk Proportional Equity (19.2.29) Proportional Gain Drew Countys Debt Service Fund = 450,000 0.33333 = 150,000 Proportional Gain Drew Countys Capital Projects Fund = 450,000 0.33333 = 150,000 Proportional Gain Town of Calvins Debt Service Fund = 450,000 0.22222 = 100,000 Proportional Gain Calvin School Districts Capital Projects Fund = 450,000 0.11111 = 50,000 53. Distribute The Gains or Losses (19.2.32): US Agency Obligations Since Gain then: XX/XX/XX InvestmentsInvestment Title Due To Sponsoring Government Source Fund AdditionsChange in Fair Value of InvestmentsParticipating Government Debit InvestmentsUS Agency Obligations 450,000 Due To Drew Countys Debt Service Fund Due To Drew Countys Capital Projects Fund AdditionsChange in Fair Value of InvestmentsTown of Calvin AdditionsChange in Fair Value of InvestmentsCalvin School District Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) 22/X8 5,000 (19.2.32) 23/X8 155,000 (19.2.32) 25/X8 300,000 (19.2.34) 27/X8 150,000 (19.2.32) balance 15,450,000 Due To Capital Projects Fund 24/X8 15,000,000 (19.2.13) 25/X8 300,000 (19.2.34) 27/X8 150,000 (19.2.32) balance 15,450,000 Debit (19.2.30) Credit (19.2.31) (19.2.31) Credit 150,000 150,000 100,000 50,000

27/X8

Ledgers

19.4. INVESTMENT TRUST FUND EXAMPLE AdditionsChange in Fair Value of InvestmentsTown of Calvin 22/X8 3,333 (19.2.32) 23/X8 103,333 (19.2.32) ( rounded) 27/X8 100,000 (19.2.32) balance 200,000 AdditionsChange in Fair Value of InvestmentsCalvin School District 22/X8 1,667 (19.2.32) 23/X8 51,667 (19.2.32) ( rounded) 27/X8 50,000 (19.2.32) balance 100,000

301

54. Proportional Interest or Dividend (19.2.33) for k in each Participating Fund (19.2.3): Proportional Interest or Dividendk = Interest Accrued or Dividend Declared Sponsoring Government Fundk Proportional Equity (19.2.29) or Participating Government Fundk Proportional Equity (19.2.29) Proportional Interest Drew Countys Debt Service Fund = 720,000 0.33333 = 240,000 Proportional Interest Drew Countys Capital Projects Fund = 720,000 0.33333 = 240,000 Proportional Interest Town of Calvins Debt Service Fund = 720,000 0.22222 = 160,000 Proportional Interest Calvin School Districts Capital Projects Fund = 720,000 0.11111 = 80,000

55. Distribute The Interest or Dividend (19.2.34) XX/XX/XX Accrued Interest (or Dividend) Receivable Due To Sponsoring Government Source Fund AdditionsInvestment EarningsParticipating Government Debit Accrued Interest Receivable 720,000 Due To Debt Service Fund Due To Capital Projects Fund AdditionsInvestment EarningsTown of Calvin AdditionsInvestment EarningsCalvin School District Accrued Interest Receivable 17/X8 425,000 (19.2.23) 18/X8 192,000 (19.2.24) 19/X8 3,000 (19.2.24) 20/X8 76,900 (19.2.24) 21/X8 13,100 (19.2.24) 25/X8 900,000 (19.2.34) 26/X8 1,610,000 (Cash received) 28/X8 720,000 (19.2.34) balance 720,000 Due To Debt Service Fund 16/X8 1,000,000 (19.2.13) 17/X8 13,850,000 (19.2.13) 22/X8 5,000 (19.2.32) 23/X8 155,000 (19.2.32) 25/X8 300,000 (19.2.34) 27/X8 150,000 (19.2.32) 28/X8 240,000 (19.2.34) balance 15,690,000 Debit Amount Credit (19.2.33) (19.2.33) Credit 240,000 240,000 160,000 80,000

28/X8

Ledgers

302

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES Due To Capital Projects Fund 24/X8 15,000,000 (19.2.13) 25/X8 300,000 (19.2.34) 27/X8 150,000 (19.2.32) 28/X8 240,000 (19.2.34) balance 15,690,000 AdditionsInvestment EarningsTown of Calvin 25/X8 200,000 (19.2.34) 28/X8 160,000 (19.2.34) balance 360,000 AdditionsInvestment EarningsCalvin School District 25/X8 100,000 (19.2.34) 28/X8 80,000 (19.2.34) balance 180,000

56. Investment Trust Funds Cash Transfer Out To Sponsoring Government (19.2.37) Debit Credit XX/XX/XX Due To Sponsoring Governments Source Fund (19.2.12) Amount Cash Amount Debit Credit 29/X8 Due To Capital Projects Fund 5,000,000 Cash 5,000,000 Ledger Due To Capital Projects Fund 24/X8 15,000,000 (19.2.13) 25/X8 300,000 (19.2.34) 27/X8 150,000 (19.2.32) 28/X8 240,000 (19.2.34) 29/X8 5,000,000 (19.2.37) balance 10,690,000 57. Total Fund Equity (19.2.27) Let m = the number of Sponsoring Governments Funds (19.2.4). Let n = the number of Participating Governments Funds (19.2.5). m Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance n + k=1 Held in Trust For Participantk (19.2.15) Credit Balance n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance n k=1 DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance n + k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance n + k=1 AdditionsInvestment Earningsk (19.2.26) Credit Balance m = 26,380,000 Total Fund Equity = j =1 Due To Sponsoring Government Source Fundj (19.2.12) Credit Balance n + k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance = 14,850,000 n 300,000 + k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance = n + k=1 AdditionsInvestment Earningsk (19.2.26) Credit Balance = 540,000 = 42,070,000 58. Fund Proportional Equity (19.2.29): Drew Countys Debt Service Fund Sponsoring Government Fundi Proportional Equity = Due To Sponsoring Government Source Fund (19.2.12) Credit Balance Total Fund Equity (19.2.27) Drew Countys Debt Service Fund Proportional Equity = 15,690,000 42,070,000 = 0.37295 59. Fund Proportional Equity (19.2.29): Drew Countys Capital Projects Fund Sponsoring Government Fundi Proportional Equity = Due To Sponsoring Government Source Fund (19.2.12) Credit Balance Total Fund Equity (19.2.27)

19.4. INVESTMENT TRUST FUND EXAMPLE Drew Countys Capital Projects Fund Proportional Equity = 10,690,000 42,070,000 = 0.25410 60. Participating Government Fundk Proportional Equity Numerator (19.2.28): Town of Calvin Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Town of Calvins Proportional Equity Numerator = 0 + 9,900,000 0 + 200,000 + 360,000 = 10,460,000 61. Fund Proportional Equity (19.2.29): Town of Calvin Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Town of Calvins Debt Service Fund Proportional Equity = 10,460,000 42,070,000 = 0.24863

303

62. Participating Government Fundk Proportional Equity Numerator (19.2.28): Calvin School District Participating Government Fundk Proportional Equity Numerator = + Held in Trust For Participantk (19.2.15) Credit Balance + AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance + AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance + AdditionsInvestment Earningsk (19.2.26) Credit Balance Calvin School Districts Proportional Equity Numerator = 0 + 4,950,000 0 + 100,000 + 180,000 = 5,230,000 63. Fund Proportional Equity (19.2.29): Calvin School District Participating Government Fundk Proportional Equity = Participating Government Fund Proportional Equity Numerator (19.2.28) Total Fund Equity (19.2.27) Calvin School Districts Capital Projects Fund Proportional Equity = 5,230,000 42,070,000 = 0.12432 64. AdditionsDeposits of Participants (19.2.40) Let n = the number of Participating Governments Funds (19.2.5). n AdditionsDeposits of Participants = k=1 AdditionsDeposits in Pooled Investmentsk (19.2.18) Credit Balance AdditionsDeposits of Participants = 9,900,000 + 4,950,000 = 14,850,000 65. AdditionsInvestment Earnings (19.2.41) Let n = the number of Participating Governments Funds (19.2.5). n AdditionsInvestment Earnings = k=1 AdditionsInvestment Earningsk (19.2.26) Credit Balance AdditionsInvestment Earnings = 360,000 + 180,000 = 540,000 66. AdditionsIncrease in Fair Value of Investments (19.2.42) Let n = the number of Participating Governments Funds (19.2.5). AdditionsIncrease in Fair Value of Investments = n k=1 AdditionsChange in Fair Value of Investmentsk (19.2.25) Credit Balance AdditionsIncrease in Fair Value of Investments = 200,000 + 100,000 = 300,000 67. AdditionsTotal Additions (19.2.43) AdditionsTotal Additions = AdditionsDeposits of Participants (19.2.40) + AdditionsInvestment Earnings (19.2.41) + AdditionsIncrease in Fair Value of Investments (19.2.42) AdditionsTotal Additions = 14,850,000 + 540,000 + 300,000 = 15,690,000

304

CHAPTER 19. STATE AND LOCAL GOVERNMENT FIDICIARY FUND EXAMPLES

68. DeductionsTotal Deductions (19.2.44) Let n = the number of Participating Governments Funds (19.2.5). n DeductionsTotal Deductions = k=1 DeductionsWithdrawals from Pooled Investmentsk (19.2.38) Debit Balance DeductionsTotal Deductions = 0 69. Investment Trust Fund Change In Net Assets (19.2.45) Investment Trust Fund Change In Net Assets = AdditionsTotal Additions (19.2.43) DeductionsTotal Deductions (19.2.44) Investment Trust Fund Change In Net Assets = 15,690,000 0 = 15,690,000 70. Investment Trust Fund Statement of Changes in Net Assets (19.2.46) Additions Deposits of participants $ 14,850,000 Investment earnings 540,000 Increase in fair value of investments 300,000 Total additions 15,690,000 Deductions Total deductions 0 Change in net assets $ 15,690,000

Chapter 20

Individual Federal Income Taxes Examples


20.1 Tax Return Problem

Example 119 A married couple has the following tax related information: 1. Tax year = 2006 2. Wifes Salary = $60,100 3. Husbands Salary = $54,000 4. Interest income = $2,700 5. Wifes Federal income taxes withheld = $5,990 6. Husbands Federal income taxes withheld = $4,180 7. Wifes state income taxes withheld = $2,940 8. Husbands state income taxes withheld = $2,330 9. Older childs birthdate = 1/25/1982 ( she lives at either home or at college and parents provide over 1/2 support) 10. Younger childs birthdate = 2/7/1986 ( he lives at either home or at college and parents provide over 1/2 support) 11. Older childs earned income = $3,800 12. Younger childs earned income = $3,500 13. Support to husbands widower father = 60% 14. Husbands father died in November 2006 15. Life insurance proceeds = $750,000 16. Personal residence property taxes = $4,870 17. Personal residence interest on mortgage = $8,980 18. Medical insurance premium = $4,240 19. Doctor bill for husbands father paid in 2006 = $7,545 20. Operation for husband = $7,450 21. Prescriptions for husband = $1,075 22. Hospital expenses for husband = $3,350 23. Medical insurance reimbursement = $3,500 305

306

CHAPTER 20. INDIVIDUAL FEDERAL INCOME TAXES EXAMPLES

24. Additional state income taxes paid = $800 25. Husbands work uniform cost = $447 26. Husbands work uniform laundry charges = $206 27. Wifes annual subscription to a professional journal = $360 28. Donations to local church = $4,900 29. Donations of used clothing to Salvation Army = $350 ( fair value) 30. The couple attended a dinner/dance to support a qualied charitable organization. The tickets cost $300. The cost of comparable entertainment would be $60. 31. Basic Standard Deduction (20.6.2) For year = 2006: If Filing Status (20.13) = Single and Taxpayer does not have a Claimant (20.14.1) then: Basic Standard Deduction = 5,150 If Filing Status (20.13) = Married, Filing Jointly then: Basic Standard Deduction = 10,300 If Filing Status (20.13) = Surviving Spouse then: Basic Standard Deduction = 10,300 If Filing Status (20.13) = Head of Household then: Basic Standard Deduction = 7,550 If Filing Status (20.13) = Married, Filing Separately then: Basic Standard Deduction = 5,150 If Filing Status (20.13) = Single and Taxpayer has a Claimant (20.14.1) then: Expanded Earned Income = Earned Income (20.12.6) + 300 If Expanded Earned Income >= 5,150 then: Basic Standard Deduction = 5,150 If Expanded Earned Income >= 850 then: Basic Standard Deduction = Expanded Earned Income If Expanded Earned Income < 850 then: Basic Standard Deduction = 850 32. Exemption Amount (20.14) For 2006 Exemption Amount Per Exemption Count (20.14.2) = 3,300 33. Individual 2006 Tax Rate Schedule (20.15.11)/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 61,300 15% 48,050 61,300 123,700 25% 46,200 123,700 188,450 28% 64,750 188,450 336,550 33% 148,100 336,550 Innity 35% Innity = (20.15.14) What is the couples taxes due or (refund)? Solution 119: 1. Other Income (20.4.4) Other Income = + Interest Income 2,700 + Prizes + Embezzled Funds + Illegal Activity Income + [Gambling Winnings Gambling Losses] + Other Income (vaguely dened) = 2,700

20.1. TAX RETURN PROBLEM 2. Gross Income (20.4) Gross Income = + Employment Income (20.4.1): Wife 60,100 + Employment Income (20.4.1): Husband 54,000 + Other Income (20.4.4) 2,700 = 116,800 3. Adjusted Gross Income (20.3) Adjusted Gross Income = + Gross Income (20.4) Adjustments (20.5) Adjusted Gross Income = 116,800 0 = 116,800 4. Unreimbursed Employee Expenditures (20.10.1) Unreimbursed Employee Expenditures = + Books, journals, and magazines 360 + Uniforms not used for normal wear 447 + Upkeep of uniforms not used for normal wear 206 = 1,013 5. Miscellaneous Itemized Deductions, 2% Floor (20.10) Miscellaneous Itemized Deductions Floor = Adjusted Gross Income (20.3) 0.02 Miscellaneous Itemized Deductions Floor = 116,800 0.02 = 2,336 Miscellaneous Itemized Deductions Amount = + Unreimbursed Employee Expenditures (20.10.1) 1,013 + Investment Expenditures (20.10.2) + Unreimbursed Charity Expenditures (20.10.3) + Tax Return Preparation Fee = 1,013 Miscellaneous Itemized Deductions = Miscellaneous Itemized Deductions Amount Miscellaneous Itemized Deductions Floor Miscellaneous Itemized Deductions = 1,013 2,336 = -1,323 Since Miscellaneous Itemized Deductions < 0 then: Miscellaneous Itemized Deductions = 0 6. Total Medical Expenditures (20.7.3) Total Medical Expenditures = + Medical Care: Doctor Visits + Medical Care: Operations + Hospital Care + Prescription Drugs + Medical Insurance Premiums Medical Insurance Proceeds =

307

7,545 7,450 3,350 1,075 4,240 3,500 20,160

7. Qualied Medical Expenditures (20.7.2) Medical Deduction Floor = Adjusted Gross Income (20.3) 0.075 Medical Deduction Floor = 116,800 0.075 = 8,760 Qualied Medical Expenditures = Total Medical Expenditures (20.7.3) Medical Deduction Floor Qualied Medical Expenditures = 20,160 8,760 = 11,400 8. State and Local Individual Ad Valorem Taxes (20.7.5) State and Local Individual Ad Valorem Taxes = + Personal Property Ad Valorem Tax + Real Estate Ad Valorem Tax State and Local Individual Ad Valorem Taxes = 4,870 9. Itemized Personal Expenditures (20.7.1) Itemized Personal Expenditures = + Qualied Medical Expenditures (20.7.2) 11,400 + State and Local Income Taxes: Husband 2,330 + State and Local Income Taxes: Wife 2,940 + State and Local Income Taxes: Additional 800 + State and Local Individual Ad Valorem Taxes (20.7.5) 4,870 + Home Mortgage Interest, Paid or Accrued 8,980 = 31,320

308

CHAPTER 20. INDIVIDUAL FEDERAL INCOME TAXES EXAMPLES

10. Qualied Charity Donations (20.8) Sum of Charity Donations = (Qualied Donation Fair Value of Consideration Received) Sum of Charity Donations = 4,900 + 350 + (300 60) = 5,490 Since Sum of Charity Donations <= 116,800 (20.3) 0.20 then: Qualied Charity Donations = 5,490 11. Itemized Deductions (20.7) Itemized Deductions = + Itemized Personal Expenditures (20.7.1) 31,320 + Qualied Charity Donations (20.8) 5,490 + Miscellaneous Itemized Deductions, 2% Floor (20.10) 0 + Other Miscellaneous Itemized Deductions, no 2% Floor (20.11) = 36,810 12. Basic Standard Deduction (20.6.2) For year = 2006: Since Filing Status (20.13) = Married, Filing Jointly then: Basic Standard Deduction = 10,300 13. Standard Deduction (20.6.1) Standard Deduction = Basic Standard Deduction (20.6.2) + Additional Standard Deduction (20.6.4) Standard Deduction = 10,300 + 0 = 10,300 14. Deduction Amount (20.6) If Standard Deduction (20.6.1) >= Itemized Deductions (20.7) then: Deduction Amount = Standard Deduction (20.6.1) If Itemized Deductions (20.7) > Standard Deduction (20.6.1) then: Deduction Amount = Itemized Deductions (20.7) Since 36,810 (20.7) > 10,300 (20.6.1) then: Deduction Amount = 36,810 15. Dependency Exemption Decision Tree (20.15.10): Older Child Young Student Test (20.15.7) Age Years = Tax Year Birth Year Age Years = 2006 1982 = 24 Since Age Years is not <= 23 then: Young Student Test (7) Fails 16. Exemption Count (20.14.2) Exemption Count = 0 If Taxpayer has no Claimant (20.14.1) then: Exemption Count = Exemption Count + 1 If Taxpayer has a spouse and Filing Status (20.13) = Married, Filing Jointly then: Exemption Count = Exemption Count + 1 For each Dependent who passes the Dependency Exemption Decision Tree (20.15.10): Exemption Count = Exemption Count + 1 Calculate Exemption Count Exemption Count = 4 ( taxpayer, spouse, father, and younger child) 17. Exemption Amount (20.14) Exemption Amount Per Exemption Count (20.14.2) = 3,300 (for 2006) Exemption Amount = Exemption Amount Per Exemption Count Exemption Count (20.14.2) Exemption Amount = 3,300 4 = 13,200 18. Taxable Income (20.1) Taxable Income = + Adjusted Gross Income (20.3) Deduction Amount (20.6) Exemption Amount (20.14) = 116,800 36,810 13,200 66,790

19. Rounded Taxable Income (20.1.1) Since the last two digits of Taxable Income (20.1) is > 75 and <= 99 then

20.1. TAX RETURN PROBLEM Rounded Taxable Income = Taxable Income rounded down to 75 Rounded Taxable Income = 66,775

309

20. Individual 2006 Tax Rate Schedule (20.15.11)/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 61,300 15% 46,200 61,300 123,700 25% 62,400 123,700 188,450 28% 64,750 188,450 336,550 33% 148,100 336,550 Innity 35% Innity = (20.15.14) 21. Tax on Rounded Taxable Income (20.15.14) 1 Remaining = Rounded Taxable Income (20.1.1) 2 For L in each layer from top to bottom: 2.1 If Remaining <= DierenceL then: 2.2 Layer AmountL = Remaining 2.3 Tax AmountL = Layer AmountL Marginal RateL 2.4 Remaining = 0 2.5 Goto step 3 2.6 If Remaining > DierenceL then: 2.7 Layer AmountL = DierenceL 2.8 Tax AmountL = Layer AmountL Marginal RateL 2.9 Remaining = Remaining - DierenceL 3 Tax on Rounded Taxable Income = 0 4 For L in each layer from top to bottom: 4.1 Tax on Rounded Taxable Income = Tax on Rounded Taxable Income + Tax AmountL (a) 1) Remaining = Rounded Taxable Income (20.1.1) 1) Remaining = 66,775 (b) 2) L = 1 (c) Dierence1 = 15,100 (d) 2.6) Since Remaining > Dierence1 then: (e) 2.7) Layer Amount1 = Dierence1 (f) Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 1,510

(g) 2.8) Tax Amount1 = Layer Amount1 Marginal Rate1 (h)

(i) 2.9) Remaining = Remaining - Dierence1 2.9) Remaining = 51,675 (j) 2) L = 2 (k) Dierence2 = 46,200 (l) 2.6) Since Remaining > Dierence1 then: (m) 2.7) Layer Amount2 = Dierence2 (n) Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 15,100 61,300 15% 46,200 46,200

(o) 2.8) Tax Amount2 = Layer Amount2 Marginal Rate2

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CHAPTER 20. INDIVIDUAL FEDERAL INCOME TAXES EXAMPLES Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 1,510 15,100 61,300 15% 46,200 46,200 6,930

(p)

(q) 2.9) Remaining = Remaining - Dierence2 2.9) Remaining = 5,475 (r) 2) L = 3 (s) Dierence3 = 62,400 (t) 2.1) Since Remaining <= Dierence3 then: (u) 2.2) Layer Amount3 = Remaining Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 15,100 61,300 15% 46,200 46,200 61,300 123,700 25% 62,400 5,475 Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 1,510 15,100 61,300 15% 46,200 46,200 6,930 61,300 123,700 25% 62,400 5,475 1,369

(v)

(w) 2.3) Tax Amount3 = Layer Amount3 Marginal Rate3

(x)

(y) 2.4) Remaining = 0 (z) 4) For L in each layer from top to bottom: 4.1) Tax on Rounded Taxable Income = Tax on Rounded Taxable Income + Tax AmountL Individual 2006 Tax Rate Schedule/Filing Status (20.13): Married, Filing Jointly or Surviving Spouse Minimum (exclusive) Maximum (inclusive) Marginal Rate Dierence Layer Amount Tax Amount 0 15,100 10% 15,100 15,100 1,510 15,100 61,300 15% 46,200 46,200 6,930 61,300 123,700 25% 62,400 5,475 1,369 9,809 22. Tax Liability Amount (20.2) Tax Liability Amount = + Tax on Rounded Taxable Income (20.15.14) 9,809 + Dividend Tax Liability Amount (20.4.5) 0 Tax Credits (20.12) 0 = 9,809 23. Taxes Due/(Refund) (20.2.1) Employer Withholdings = 5,990 + 4,180 = 10,170 Taxes Due/(Refund) = + Tax Liability Amount (20.2) 9,809 Employer Withholdings 10,170 Quarterly Prepayments 0 = -361

( Refund since negative)

20.2

Child Tax Credit

Example 120: With Phaseout A married couple has the following Child Tax Credit information: Dependent child 1 age = 6 Dependent child 2 age = 8 Adjusted Gross Income = $122,400 Filing Status = Married, Filing Jointly What is the Child Tax Credit? Solution 120:

20.2. CHILD TAX CREDIT 1. Child Tax Credit Qualifying Count (20.12.3) For each Dependent who passes the Dependency Exemption Decision Tree (20.15.10) and If Age <= 16 on 12/31 and If a U.S. Citizen or Resident: Qualifying Count = Qualifying Count + 1 Qualifying Count = 2 2. Child Tax Credit Phaseout Amount (20.12.2) Since Filing Status (20.13) = Married, Filing Jointly then: AGI Phaseout Floor = 110,000 (for 2007) Calculate Phaseout Amount Phaseout Numerator = Adjusted Gross Income (20.3) AGI Phaseout Floor Phaseout Numerator = 122,400 110,000 = 12,400 Since Phaseout Numerator > 0 then: Numerator ) 50 Child Tax Credit Phaseout Amount = RoundedUp( Phaseout 1,000 12,400 Child Tax Credit Phaseout Amount = RoundedUp( 1,000 ) 50 Child Tax Credit Phaseout Amount = RoundedUp(12.4) 50 Child Tax Credit Phaseout Amount = 13 50 = 650 3. Child Tax Credit (20.12.1) Credit Per Child = 1,000 (in 2007) Child Tax Credit = [Credit Per Child Child Tax Credit Qualifying Count (20.12.3)] Child Tax Credit Phaseout Amount (20.12.2) Child Tax Credit = [1,000 2] 650 = 1,350

311

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CHAPTER 20. INDIVIDUAL FEDERAL INCOME TAXES EXAMPLES